Partenership

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Publication 541 Contents(Rev. November 2004)Cat. No. 15071D

Important Reminder . . . . . . . . . . . . . . . 1Departmentof the

Introduction . . . . . . . . . . . . . . . . . . . . . 1Treasury PartnershipsForming a Partnership . . . . . . . . . . . . . 2Internal

RevenueTerminating a Partnership . . . . . . . . . . . 3Service

For use in preparingExclusion From Partnership

Rules . . . . . . . . . . . . . . . . . . . . . . 32003 ReturnsTax Year . . . . . . . . . . . . . . . . . . . . . . . 4

Partnership Return (Form 1065) . . . . . . . 5Attention: This publication will not be revised for use inpreparing 2004 returns. For the next revision, we are considering Penalties . . . . . . . . . . . . . . . . . . . . . . . 5using a new format that will not require annual updates. Since

Partnership Income or Lossthe tax law this publication covers generally does not(Form 1065 Only) . . . . . . . . . . . . . . 5significantly change from year to year, you can use this 2003 text

as a general guide to prepare 2004 returns. To find changes that Partner’s Income or Loss . . . . . . . . . . . 6may affect 2004 returns, see What’s New in your income taxreturn instructions; Publication 553, Highlights of 2004 Tax Partnership Distributions . . . . . . . . . . . 9Changes; or What’s Hot In Tax Forms, Pubs, and Other Tax

Transactions BetweenProducts at www.irs.gov/formspubs. To comment on thisPartnership and Partners . . . . . . . . 11revision process, see Comments and Suggestions on page 2.

Basis of Partner’s Interest . . . . . . . . . . . 14

Disposition of Partner’s Interest . . . . . . 15

Adjusting the Basis ofPartnership Property . . . . . . . . . . . 17

Form 1065 Example . . . . . . . . . . . . . . . 18

How To Get Tax Help . . . . . . . . . . . . . . 27

Index . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Important ReminderPhotographs of missing children. The Inter-nal Revenue Service is a proud partner with theNational Center for Missing and Exploited Chil-dren. Photographs of missing children selectedby the Center may appear in this publication onpages that would otherwise be blank. You canhelp bring these children home by looking at thephotographs and calling 1–800–THE–LOST(1–800–843–5678) if you recognize a child.

IntroductionThis publication explains how the income taxlaw applies to partnerships and to partners.Generally, a partnership does not pay tax on itsincome but “passes through” any profits orGet forms and other informationlosses to its partners. Partners must includefaster and easier by:partnership items on their tax returns.

For a discussion of business expenses aInternet • www.irs.govpartnership can deduct, see Publication 535,Business Expenses. Members of oil and gasFAX • 703–368–9694 (from your fax machine)partnerships should read about the deductionfor depletion in chapter 10 of that publication.

Certain partnerships must have a tax matterspartner (TMP) who is also a general partner. For

www.irs.gov/efile information on the rules for designating a TMP,see Designation of Tax Matters Partner (TMP) in



the Form 1065 instructions and section ❏ 8308 Report of a Sale or Exchange of otherwise subject to special treatment301.6231(a)(7)–1 of the regulations. Certain Partnership Interests under the Internal Revenue Code.

Many rules in this publication do not ❏ 8582 Passive Activity Loss Limitations • Any other organization that elects to beapply to partnerships that file Form classified as a corporation by filing Form

❏ 8736 Application for Automatic Extension1065–B, U.S. Return of Income for 8832.CAUTION

!of Time To File U.S. Return for a

Electing Large Partnerships. For the rules that Partnership, REMIC, or for Certain For more information, see the instructions forapply to these partnerships, see the instructions Trusts Form 8832.for Form 1065–B. However, the partners of

❏ 8832 Entity Classification Election Limited liability company. A limited liabil-electing large partnerships can use the rules inity company (LLC) is an entity formed underthis publication except as otherwise noted.

❏ 8865 Return of U.S. Persons Withstate law by filing articles of organization as anRespect to Certain ForeignLLC. Unlike a partnership, none of the membersWithholding on foreign partner or firm. If a Partnershipsof an LLC are personally liable for its debts. Anpartnership acquires a U.S. real property inter-

❏ 8886 Reportable Transaction Disclosure LLC may be classified for federal income taxest from a foreign person or firm, the partnershipStatement purposes as either a partnership, a corporation,may have to withhold tax on the amount it pays

or an entity disregarded as an entity separatefor the property (including cash, the fair market See How To Get Tax Help near the end offrom its owner by applying the rules in regula-value of other property, and any assumed liabil- this publication for information about gettingtions section 301.7701–3. See Form 8832 andity). If a partnership has income effectively con- publications and forms.section 301.7701–3 of the regulations for morenected with a trade or business in the Uniteddetails.States, it must withhold on the income allocable

to its foreign partners. A partnership may have to A domestic LLC with at least two mem-withhold tax on a foreign partner’s distributive bers that does not file Form 8832 isForming a Partnershipshare of fixed or determinable income not effec- classified as a partnership for federal

TIP

tively connected with a U.S. trade or business. A income tax purposes.The following sections contain general informa-partnership that fails to withhold may be heldtion about partnerships.liable for the tax, applicable penalties, and inter- Organizations formed before 1997. An or-

est. ganization formed before 1997 and classified asOrganizations Classified asFor more information, see Publication 515, a partnership under the old rules will generallyWithholding of Tax on Nonresident Aliens and Partnerships continue to be classified as a partnership as longForeign Entities. as the organization has at least two membersAn unincorporated organization with two or

and does not elect to be classified as a corpora-more members is generally classified as a part-Comments and suggestions. We welcometion by filing Form 8832.nership for federal tax purposes if its membersyour comments about this publication and your

carry on a trade, business, financial operation,suggestions for future editions. Community property. A husband and wifeor venture and divide its profits. However, a jointYou can email us at *[email protected]. who own a qualified entity (defined later) canundertaking merely to share expenses is not aPlease put “Publications Comment” on the sub- choose to classify the entity as a partnership forpartnership. For example, co-ownership of prop-ject line. federal tax purposes by filing the appropriateerty maintained and rented or leased is not a partnership tax returns. They can choose toYou can write to us at the following address:partnership unless the co-owners provide serv- classify the entity as a sole proprietorship byices to the tenants. filing a Schedule C (Form 1040) listing oneInternal Revenue Service

spouse as the sole proprietor. A change in re-Business Forms and Publications The rules you must use to determineporting position will be treated for federal taxSE:W:CAR:MP:T:B whether an organization is classified as a part-purposes as a conversion of the entity.1111 Constitution Ave. NW nership changed for organizations formed after

A qualified entity is a business entity thatWashington, DC 20224 1996.meets all the following requirements.

Organizations formed after 1996. An organi-We respond to many letters by telephone. • The business entity is wholly owned by azation formed after 1996 is classified as a part-Therefore, it would be helpful if you would in- husband and wife as community propertynership for federal tax purposes if it has two orclude your daytime phone number, including the under the laws of a state, a foreign coun-more members and it is none of the following.area code, in your correspondence. try, or a possession of the United States.• An organization formed under a federal or • No person other than one or both spousesUseful Items state law that refers to it as incorporated would be considered an owner for federal

You may want to see: or as a corporation, body corporate, or tax purposes.body politic.

• The business entity is not treated as aPublication • An organization formed under a state law corporation.❏ 505 Tax Withholding and Estimated Tax that refers to it as a joint-stock company or

joint-stock association. For more information about community prop-❏ 533 Self-Employment Taxerty, see Publication 555, Community Property.• An insurance company.

❏ 535 Business Expenses Publication 555 discusses the community prop-• Certain banks. erty laws of Arizona, California, Idaho, Louisi-❏ 537 Installment Salesana, Nevada, New Mexico, Texas, Washington,• An organization wholly owned by a state

❏ 538 Accounting Periods and Methods and Wisconsin.or local government.❏ 544 Sales and Other Dispositions of • An organization specifically required to beAssets Family Partnershiptaxed as a corporation by the Internal Rev-❏ 551 Basis of Assets enue Code (for example, certain publicly Members of a family can be partners. However,

traded partnerships). family members (or any other person) will be❏ 925 Passive Activity and At-Risk Rulesrecognized as partners only if one of the follow-• Certain foreign organizations identified in

❏ 946 How To Depreciate Property ing requirements is met.section 301.7701–2(b)(8) of the regula-tions. • If capital is a material income-producingForm (and Instructions)

factor, they acquired their capital interest• A tax-exempt organization.❏ 1065 U.S. Return of Partnership Income in a bona fide transaction (even if by gift or• A real estate investment trust.❏ Schedule K–1 (Form 1065) Partner’s purchase from another family member),

Share of Income, Credits, actually own the partnership interest, and• An organization classified as a trust underDeductions, etc. actually control the interest.section 301.7701–4 of the regulations or

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• If capital is not a material income-produc- they have a formal partnership agreement. If so, must be filed for the short period, which is theing factor, they joined together in good they should report income or loss from the busi- period from the beginning of the tax year throughfaith to conduct a business. They agreed ness on Form 1065. They should not report the the date of termination. The return is due thethat contributions of each entitle them to a income on a Schedule C (Form 1040) in the 15th day of the fourth month following the date ofshare in the profits, and some capital or name of one spouse as a sole proprietor. termination. See Partnership Return (Formservice has been (or is) provided by each Each spouse should carry his or her share of 1065), later, for information about filing Formpartner. the partnership income or loss from Schedule 1065.

K–1 (Form 1065) to their joint or separateForm(s) 1040. Each spouse should include his Conversion of partnership into limited liabil-Capital is material. Capital is a materialor her respective share of self-employment inity company (LLC). The conversion of a part-income-producing factor if a substantial part ofcome on a separate Schedule SE (Form 1040), nership into an LLC classified as a partnershipthe gross income of the business comes fromSelf-Employment Tax. This generally does not for federal tax purposes does not terminate thethe use of capital. Capital is ordinarily anincrease the total tax on the return, but it does partnership. The conversion is not a sale, ex-income-producing factor if the operation of thegive each spouse credit for social security earn- change, or liquidation of any partnership inter-business requires substantial inventories or in-ings on which retirement benefits are based. est, the partnership’s tax year does not close,vestments in plants, machinery, or equipment.

and the LLC can continue to use theCapital is not material. In general, capital is Partnership Agreement partnership’s taxpayer identification number.not a material income-producing factor if the

However, the conversion may change someincome of the business consists principally of The partnership agreement includes the original of the partners’ bases in their partnership inter-fees, commissions, or other compensation for agreement and any modifications. The modifica- ests if the partnership has recourse liabilitiespersonal services performed by members or tions must be agreed to by all partners orthat become nonrecourse liabilities. Becauseemployees of the partnership. adopted in any other manner provided by thethe partners share recourse and nonrecoursepartnership agreement. The agreement or modi-

Capital interest. A capital interest in a part- liabilities differently, their bases must be ad-fications can be oral or written.nership is an interest in its assets that is distrib- justed to reflect the new sharing ratios. If aPartners can modify the partnership agree-utable to the owner of the interest in either of the decrease in a partner’s share of liabilities ex-ment for a particular tax year after the close offollowing situations. ceeds the partner’s basis, he or she must recog-the year but not later than the date for filing the

nize gain on the excess. For more information,partnership return for that year. This filing date• The owner withdraws from the partner-see Effect of Partnership Liabilities under Basisdoes not include any extension of time.ship.of Partner’s Interest, later.If the partnership agreement or any modifica-• The partnership liquidates. The same rules apply if an LLC classified astion is silent on any matter, the provisions ofa partnership is converted into a partnership.local law are treated as part of the agreement.The mere right to share in earnings and profits

is not a capital interest in the partnership. IRS e-file (Electronic Filing)Gift of capital interest. If a family member (orany other person) receives a gift of a capital Terminating ainterest in a partnership in which capital is a

Partnershipmaterial income-producing factor, the donee’sdistributive share of partnership income is sub-

A partnership terminates when one of the follow-ject to both of the following restrictions. Certain partnerships with more than 100ing events takes place. partners are required to file Form 1065, Sched-• It must be figured by reducing the partner-

ules K–1, and related forms and schedulesship income by reasonable compensation 1. All its operations are discontinued and noelectronically (e-file). Other partnerships gener-for services the donor renders to the part- part of any business, financial operation, orally have the option to file electronically. Fornership. venture is continued by any of its partnersdetails about IRS e-file, see the Form 1065 in-in a partnership.• The donee’s distributive share of partner- structions.

ship income attributable to donated capital 2. At least 50% of the total interest in partner-must not be proportionately greater than ship capital and profits is sold or ex-the donor’s distributive share attributable changed within a 12-month period,to the donor’s capital. including a sale or exchange to another Exclusion From

partner.Purchase. For purposes of determining a Partnership RulesUnlike other partnerships, an electing large part-partner’s distributive share, an interest pur-

nership does not terminate on the sale or ex-chased by one family member from anotherCertain partnerships that do not actively conductchange of 50% or more of the partnershipfamily member is considered a gift from thea business can choose to be completely or par-interests within a 12-month period.seller. The fair market value of the purchasedtially excluded from being treated as partner-See section 1.708–1(b) of the regulationsinterest is considered donated capital. For thisships for federal income tax purposes. All thefor more information on the termination of apurpose, members of a family include onlypartners must agree to make the choice, and thepartnership. For special rules that apply to aspouses, ancestors, and lineal descendants (orpartners must be able to compute their ownmerger, consolidation, or division of a partner-a trust for the primary benefit of those persons).taxable income without computing theship, see sections 1.708–1(c) and 1.708–1(d)partnership’s income. However, the partners areof the regulations.Example. A father sold 50% of his businessnot exempt from the rule that limits a partner’sto his son. The resulting partnership had a profitdistributive share of partnership loss to the ad-Date of termination. The partnership’s taxof $60,000. Capital is a material income-produc-

year ends on the date of termination. For the justed basis of the partner’s partnership interest.ing factor. The father performed services worthevent described in (1), earlier, the date of termi- Nor are they exempt from the requirement of a$24,000, which is reasonable compensation,nation is the date the partnership completes the business purpose for adopting a tax year for theand the son performed no services. Thewinding up of its affairs. For the event described partnership that differs from its required tax$24,000 must be allocated to the father as com-in (2), earlier, the date of termination is the date year, discussed under Tax Year, later.pensation. Of the remaining $36,000 of profitof the sale or exchange of a partnership interestdue to capital, at least 50%, or $18,000, must bethat, by itself or together with other sales or Investing partnership. An investing partner-allocated to the father since he owns a 50%exchanges in the preceding 12 months, trans- ship can be excluded if the participants in thecapital interest. The son’s share of partnershipfers an interest of 50% or more in both capital joint purchase, retention, sale, or exchange ofprofit cannot be more than $18,000.and profits. investment property meet all the following re-

Husband-wife partnership. If spouses carry quirements.on a business together and share in the profits Short period return. If a partnership is termi-

• They own the property as co-owners.and losses, they may be partners whether or not nated before the end of the tax year, Form 1065

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• They reserve the right separately to take usually allowed to change their accounting peri- those tax years as its tax year. However, if oneor dispose of their shares of any property ods without prior approval if they meet certain of the years that qualifies is the partnership’sacquired or retained. conditions. existing tax year, the partnership must retain

that tax year.• They do not actively conduct business orClosing of tax year. Generally, theirrevocably authorize some person acting

Example. Rose and Irene each have a 50%partnership’s tax year is not closed because ofin a representative capacity to purchase,interest in a partnership that uses a fiscal yearthe sale, exchange, or liquidation of a partner’ssell, or exchange the investment property.ending June 30. Rose uses a calendar yearinterest, the death of a partner, or the entry of aEach separate participant can delegatewhile Irene has a fiscal year ending Novembernew partner. However, if a partner sells, ex-authority to purchase, sell, or exchange

changes, or liquidates his or her entire interest, 30. The partnership must change its tax year tohis or her share of the investment propertyor a partner dies, the partnership’s tax year is a fiscal year ending November 30 because thisfor the time being for his or her account,closed for that partner. See Distributive share in results in the least aggregate deferral of incomebut not for a period of more than a year.year of disposition under Partner’s Income or to the partners. This was determined as shownLoss, later. in the following table.

Operating agreement partnership. An oper-ating agreement partnership group can be ex- Year Months InterestRequired Tax Yearcluded if the participants in the joint production, End Year Profits of ×extraction, or use of property meet all the follow- 12/31: End Interest Deferral DeferralA partnership generally must conform its taxing requirements. year to its partners’ tax years. The rules for Rose . . 12/31 0.5 -0- -0-

determining the required tax year are as follows.• They own the property as co-owners, ei- Irene . . 11/30 0.5 11 5.5ther in fee or under lease or other form of • Majority interest tax year. If one or more Total Deferral . . . . . . . . . . . . . . 5.5contract granting exclusive operating

partners having the same tax year own anrights. Year Months Interestinterest in partnership profits and capital ofEnd Year Profits of ×• They reserve the right separately to take more than 50% (a majority interest), the11/30: End Interest Deferral Deferralin kind or dispose of their shares of any partnership must use the tax year of those

property produced, extracted, or used. partners. Rose . . 12/31 0.5 1 0.5Irene . . 11/30 0.5 -0- -0-Testing day. The partnership determines• They do not jointly sell services or the

if there is a majority interest tax year on theproperty produced or extracted. Each sep- Total Deferral . . . . . . . . . . . . . . 0.5testing day, which is usually the first day ofarate participant can delegate authority tothe partnership’s current tax year.sell his or her share of the property pro-

Special de minimis rule. If the tax year thatChange in tax year. If a partnership’sduced or extracted for the time being forresults in the least aggregate deferral producesmajority interest tax year changes, it will nothis or her account, but not for a period ofan aggregate deferral that is less than 0.5 whenbe required to change to another tax yeartime in excess of the minimum needs ofcompared to the aggregate deferral of the cur-for 2 years following the year of change. the industry, and in no event for more thanrent tax year, the partnership’s current tax yearone year. • Principal partner. If there is no majorityis treated as the tax year with the least aggre-interest tax year, the partnership must useHowever, this exclusion does not apply to an gate deferral.the tax year of all its principal partners. Aunincorporated organization one of whose prin-

principal partner is one who has a 5% or When determination is made. Generally,cipal purposes is cycling, manufacturing, ormore interest in the profits or capital of the determination of the partnership’s required taxprocessing for persons who are not members ofpartnership.the organization. year under the least aggregate deferral rules is

made at the beginning of the partnership’s cur-• Least aggregate deferral of income. IfElecting the exclusion. An eligible organiza- rent tax year. However, the IRS can require thethere is no majority interest tax year andtion that wishes to be excluded from the partner- partnership to use another day or period that willthe principal partners do not have theship rules must make the election not later than more accurately reflect the ownership of thesame tax year, the partnership generallythe time for filing the partnership return for the partnership. This could occur, for example, if amust use a tax year that results in thefirst tax year for which exclusion is desired. This partnership interest was transferred for the pur-least aggregate deferral of income to thefiling date includes any extension of time. See pose of qualifying for a particular tax year.partners.section 1.761–2(b) of the regulations for theprocedures to follow. Procedures. A newly formed partnership isLeast aggregate deferral of income. The tax

not required to request approval from the IRS if ityear that results in the least aggregate deferraladopts its required tax year. A partnership canof income is determined as follows.get an automatic approval to change to a re-Tax Year quired tax year by filing Form 1128 with the1. Figure the number of months of deferral forService Center where it files its federal incomeeach partner using one partner’s tax year.Taxable income is figured on the basis of a tax tax returns. Form 1128 must be filed by the dueCount the months from the end of that taxyear. A “tax year” is the accounting period useddate (including extensions) for filing the shortyear forward to the end of each otherfor keeping records and reporting income andperiod tax return. If a partnership does not qual-partner’s tax year.expenses.ify for automatic approval to adopt, change, or

2. Multiply each partner’s months of deferral retain a tax year, it can request a ruling. SeePartnership. A partnership determines its tax figured in step (1) by that partner’s interest Publication 538 for more information on auto-year as if it were a taxpayer. However, there are in the partnership profits for the year usedmatic approval and ruling request procedures.limits on the year it can choose. In general, a in step (1).

partnership must use its required tax year. A Short period return. When a partnership3. Add the results in step (2) to get the totalrequired tax year is a tax year that is required changes its tax year, a short period return mustdeferral for the tax year used in step (1).under the Internal Revenue Code and Income be filed. The short period return covers theTax Regulations. For a partnership, the required 4. Repeat steps (1) through (3) for each months between the end of the partnership’stax year is the tax year determined under section partner’s tax year that is different from the prior tax year and the beginning of its new tax706 of the Internal Revenue Code and section other partners’ years. year.1.706 of the regulations. See Required Tax

If a partnership changes to the tax year re-The partner’s tax year that results in theYear, later. Exceptions to this rule are discussedsulting in the least aggregate deferral, it must filelowest total number in step (3) is the tax yearunder Exceptions to Required Tax Year, later.a Form 1128 with the short period return show-that must be used by the partnership. If theing the computations used to determine that taxcalculation results in more than one year qualify-Partners. Partners can change their tax yearyear. The Form 1128 should also be attached toing as the tax year that has the least aggregateonly if they receive permission from the IRS.

deferral, the partnership can choose any one of the partnership tax return.This also applies to corporate partners, who are

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time allowed by the section 444 election. The This may also include someone who signsExceptions to Requiredfiling of an application for extension does not checks for the partnership or otherwise has au-Tax Year extend the time for filing a partner’s personal thority to cause the spending of partnershipincome tax return or for paying any tax due on a funds.There are certain exceptions to the required taxpartner’s personal income tax return.year rule.

Other penalties. Criminal penalties can beIf the due date for filing a return falls on aBusiness purpose tax year. If a partnership imposed for willful failure to file, tax evasion, orSaturday, Sunday, or legal holiday, the due dateestablishes an acceptable business purpose for making a false statement.is extended to the next business day.having a tax year different from its required tax Other penalties can be imposed for the fol-

Schedule K–1 due to partners. The partner-year, the different tax year can be used. Admin- lowing actions.ship must furnish copies of Schedule K–1 (Formistrative and convenience business reasons1065) to the partners by the date Form 1065 is • Not supplying a taxpayer identificationsuch as the deferral of income to the partnersrequired to be filed, including extensions. number.are not sufficient to establish a business pur-

pose for a particular tax year. • Not furnishing information returns.See Business Purpose Tax Year in Publica-

• Underpaying tax due to a valuation mis-tion 538 for more information.statement.Penalties

Section 444 election. A partnership can elect • Not furnishing information on tax shelters.under section 444 of the Internal Revenue Code To help ensure that returns are filed correctlyto use a tax year different from its required tax • Promoting abusive tax shelters.and on time, the law provides penalties for fail-year. Certain restrictions apply to this election. ure to do so.In addition, the electing partnership may be re- However, certain penalties may not be im-

Failure to file. A penalty is assessed againstquired to make a payment representing the posed if there is reasonable cause for noncom-any partnership that must file a partnership re-value of the extra tax deferral to the partners. pliance.turn and fails to file on time, including exten-See Form 8716, Election To Have a Taxsions, or fails to file a return with all theYear Other Than a Required Tax Year, andinformation required. The penalty is $50 timesSection 444 Election in Publication 538 for morethe total number of partners in the partnershipinformation. Partnership Incomeduring any part of the tax year for each month (or

52-53-week tax year. A partnership can use a part of a month) the return is late or incomplete, or Loss (Form 1065tax year other than its required tax year if it up to 5 months.elects a 52-53-week tax year that ends with The penalty will not be imposed if the part- Only)reference to either its required tax year or a tax nership can show reasonable cause for its fail-year elected under section 444 (discussed ear- ure to file a complete or timely return. Certain A partnership computes its income and files itslier). See 52-53-Week Tax Year under Fiscal small partnerships (with 10 or fewer partners) return in the same manner as an individual.Year in Publication 538 for information on the meet this reasonable cause test if: However, certain deductions are not allowed to52-53-week tax year.

the partnership.1. All partners are individuals (other thannonresident aliens), estates, or C corpora- Separately stated items. Certain items musttions, be separately stated on the partnership returnPartnership Return 2. All partners have timely filed income tax and included as separate items on the partners’returns fully reporting their shares of the returns. These items, listed on Schedule K(Form 1065) partnership’s income, deductions, and (Form 1065), are the following.credits, and

Every partnership that engages in a trade or • Ordinary income or loss from trade or3. The partnership has not elected to be sub-business or has gross income must file an infor- business activities.

ject to the rules for consolidated audit pro-mation return on Form 1065 showing its income, • Net income or loss from rental real estateceedings (explained later under Partner’sdeductions, and other required information. Theactivities.Income or Loss, in the discussion underpartnership return must show the names and

Reporting Distributive Share).addresses of each partner and each partner’s • Net income or loss from other rental activi-distributive share of taxable income. The return ties.The failure to file penalty is assessed againstmust be signed by a general partner. If a limited the partnership. However, each partner is indi- • Gains and losses from sales or exchangesliability company is treated as a partnership, it vidually liable for the penalty to the extent the of capital assets.must file Form 1065 and one of its members partner is liable for partnership debts in general.must sign the return. • Gains and losses from sales or exchangesIf the partnership wants to contest the pen-

A partnership is not considered to engage in of property described in section 1231 ofalty, it must pay the penalty and sue for refund ina trade or business, and is not required to file a the Internal Revenue Code.a U.S. District Court or the U.S. Court of FederalForm 1065, for any tax year in which it neither Claims. • Charitable contributions.receives income nor pays or incurs any ex-

Failure to furnish copies to the partners.penses treated as deductions or credits for fed- • Dividends (passed through to corporateThe partnership must furnish copies of Scheduleeral income tax purposes. partners) that qualify for the dividends-re-K–1 (Form 1065) to the partners. A penalty forSee the instructions for Form 1065 for more ceived deduction.each statement not furnished will be assessedinformation about who must file Form 1065. • Taxes paid or accrued to foreign countriesagainst the partnership unless the failure to do

and U.S. possessions.Due date. Form 1065 generally must be filed so is due to reasonable cause and not willfulby April 15 following the close of the neglect. • Other items of income, gain, loss, deduc-partnership’s tax year if its accounting period is tion, or credit, as provided by regulations.the calendar year. A fiscal year partnership gen- Trust fund recovery penalty. A person re- Examples include nonbusiness expenses,erally must file its return by the 15th day of the sponsible for withholding, accounting for, or de- intangible drilling and development costs,4th month following the close of its fiscal year. positing or paying withholding taxes who willfully and soil and water conservation expenses.

If a partnership needs more time to file its fails to do so can be held liable for a penaltyreturn, it should file Form 8736 by the regular equal to the tax not paid.

Elections. The partnership makes mostdue date of its Form 1065. The automatic exten- “Willfully” in this case means voluntarily, con-choices about how to figure income. These in-sion is 3 months. sciously, and intentionally. Paying other ex-clude choices for the following items.If the partnership has made a section 444 penses of the business instead of the taxes due

election to use a tax year other than a required is considered willful behavior. • Accounting method.year, an automatic extension of time for filing a A responsible person can be a partner, anreturn will run concurrently with any extension of employee of the partnership, or an accountant. • Depreciation method.

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• Method of accounting for specific items, 3. The type that would be amortized if they1. 90% of the tax expected to be shown onwere incurred in the creation of a partner-such as depletion or installment sales.

the current year’s tax return.ship having a fixed life.• Nonrecognition of gain on involuntary con-2. 100% of the total tax shown on the priorTo satisfy (1), an expense must be incurredversions of property.

year’s tax return.during the period beginning at a point that is a• Amortization of certain organization fees reasonable time before the partnership begins Different rules apply to certain higher incomeand business start-up costs of the partner- business and ending with the date for filing the individuals and individuals who receive at leastship. partnership return (not including extensions) for two-thirds of their gross income from farming orthe tax year in which the partnership begins fishing.However, each partner chooses how to treat business. In addition, the expense must be for See Publication 505 for more information.

the partner’s share of foreign and U.S. posses- creating the partnership and not for starting orSelf-employment income. A partner is not ansions taxes, certain mining exploration ex- operating the partnership trade or business.employee of the partnership. The partner’s dis-penses, and income from cancellation of debt. To satisfy (3), the expense must be for a typetributive share of ordinary income from a part-of item normally expected to benefit the partner-More information. For more information on nership is generally included in figuring netship throughout its entire life.a specific election, see the listed publication. earnings from self-employment. However, a lim-Organization expenses that can be amor-ited partner generally does not include his or hertized include the following.• Accounting methods: Publication 538.distributive share of income or loss in computing

• Legal fees for services incident to the or-• Depreciation methods: Publication 946. net earnings from self-employment. This exclu-ganization of the partnership, such as ne- sion does not apply to guaranteed payments• Installment sales: Publication 537. gotiation and preparation of a partnership made to a limited partner for services actuallyagreement.• Amortization and depletion: Publication rendered to or on behalf of a partnership en-

535, chapters 9 and 10. gaged in a trade or business.• Accounting fees for services incident tothe organization of the partnership.• Involuntary conversions: Publication 544 Self-employment tax. If an individual part-

(condemnations) and Publication 547 ner has net earnings from self-employment of• Filing fees.(casualties and thefts). $400 or more for the year, the partner must

figure self-employment tax on Schedule SEExpenses not amortizable. Expenses that(Form 1040). For more information on self-em-cannot be amortized (regardless of how theOrganization expenses and syndicationployment tax, see Publication 533.partnership characterizes them) include ex-fees. Neither the partnership nor any partner

penses connected with the following actions.can deduct, as a current expense, amounts paid Alternative minimum tax. To figure alterna-or incurred to organize a partnership or to pro- tive minimum tax, a partner must separately• Acquiring assets for the partnership ormote the sale of, or to sell, an interest in the take into account any distributive share of itemstransferring assets to the partnership.

of income and deductions that enter into thepartnership. • Admitting or removing partners other than computation of alternative minimum taxable in-The partnership can choose to amortize cer- at the time the partnership is first organ- come. For information on which items of incometain organization expenses over a period of not ized. and deductions are affected, see the Form 6251less than 60 months. The period must start withinstructions.• Making a contract relating to the operationthe month the partnership begins business. This

of the partnership trade or business (evenelection is irrevocable and the period the part- Partners of electing large partnershipsif the contract is between the partnershipnership chooses in this election cannot be should see the Partner’s Instructionsand one of its members). for Schedule K–1 (Form 1065–B), forchanged. If the partnership elects to amortize CAUTION

!information on alternative minimum tax.these expenses and is liquidated before the end • Syndicating the partnership. Syndication

of the amortization period, the remaining bal- expenses, such as commissions, profes-sional fees, and printing costs connectedance in this account is deductible as a loss. Figuring Distributive Sharewith the issuing and marketing of interests

Making the election. The election to amor- in the partnership, are capitalized. They Generally, the partnership agreement deter-tize organization expenses is made by attaching can never be deducted by the partnership, mines a partner’s distributive share of any itema statement to the partnership’s return for the tax even if the syndication is unsuccessful. or class of items of income, gain, loss, deduc-year the partnership begins its business. Thetion, or credit. However, the allocations provided

statement must provide all the following informa- for in the partnership agreement or any modifi-tion. cation will be disregarded if they do not have

substantial economic effect. If the partnership• A description of each organization ex- Partner’s Incomeagreement does not provide for an allocation, orpense incurred (whether or not paid).an allocation does not have substantial eco-or Loss• The amount of each expense. nomic effect, the partner’s distributive share ofthe partnership items is generally determined by• The date each expense was incurred. A partner’s income or loss from a partnership isthe partner’s interest in the partnership. For spe-the partner’s distributive share of partnership• The month the partnership began its busi- cial allocation rules for items attributable toitems for the partnership’s tax year that endsness. built-in gain or loss on property contributed by awith or within the partner’s tax year. These itemspartner, see Contribution of Property under• The number of months (not less than 60) are reported to the partner on Schedule K–1Transactions Between Partnership and Part-(Form 1065).over which the expenses are to be amor-ners, later.tized.

Gross income. When it is necessary to deter-Substantial economic effect. An allocationmine the gross income of a partner, the partner’sExpenses less than $10 need not be sepa- has substantial economic effect if both of thegross income includes his or her distributiverately listed, provided the total amount is listed following tests are met.share of the partnership’s gross income. For

with the dates on which the first and last of the example, the partner’s share of the partnership • There is a reasonable possibility that theexpenses were incurred. A cash basis partner- gross income is used in determining whether an allocation will substantially affect the dollarship must also indicate the amount paid before income tax return must be filed by that partner. amount of the partners’ shares of partner-the end of the year for each expense. ship income or loss independently of taxEstimated tax. Partners may have to make

consequences.Amortizable expenses. Amortization ap- payments of estimated tax during the year as aplies to expenses that are: result of partnership income. • The partner to whom the allocation is

Generally, estimated tax for individuals is the made actually receives the economic ben-1. Incident to the creation of the partnership,smaller of the following amounts, reduced by efit or bears the economic burden corre-

2. Chargeable to a capital account, and any expected withholding and credits. sponding to that allocation.

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Allocation attributable to a nonrecourse Certain cash basis items prorated daily. See the Partner’s Instructions for Scheduleliability. An allocation of a loss, deduction, or If any partner’s interest in a partnership changes K–1 (Form 1065) for more information.expense attributable to a partnership nonre- during the tax year, each partner’s share of

Character of items. The character of eachcourse liability does not have any economic certain cash basis items of the partnership mustitem of income, gain, loss, deduction, or crediteffect because the partner does not bear the be determined by prorating the items on a dailyincluded in a partner’s distributive share is deter-economic burden corresponding to that alloca- basis. That daily portion is then allocated to themined as if the partner realized the item directlytion. (See Effect of Partnership Liabilities under partners in proportion to their interests in thefrom the same source as the partnership orBasis of Partner’s Interest, later.) Therefore, the partnership at the close of each day. This ruleincurred the item in the same manner as thepartner’s distributive share of the item must be applies to the following items for which the part-partnership.determined by his or her interest in the partner- nership uses the cash method of accounting.

For example, a partner’s distributive share ofship. For more information, see section 1.704–2 • Interest. gain from the sale of partnership depreciableof the regulations.property used in the trade or business of the• Taxes.partnership is treated as gain from the sale ofPartner’s interest in partnership. If a • Payments for services or for the use of depreciable property the partner used in a tradepartner’s distributive share of a partnership item

property. or business.cannot be determined under the partnershipagreement, it is determined by his or her interest Inconsistent treatment of items. Partnersin the partnership. The partner’s interest is de- Distributive share in year of disposition. If a must generally treat partnership items the sametermined by taking into account all the following partner’s entire interest in a partnership is dis- way on their individual tax returns as they areitems. posed of, whether by sale, exchange, liquida- treated on the partnership return. If a partner

tion, the partner’s death, or otherwise, his or her treats an item differently on his or her individual• The partners’ relative contributions to the distributive share of partnership items must be return, the IRS can immediately assess andpartnership. included in the partner’s income for the tax year collect any tax and penalties that result from• The interests of all partners in economic in which membership in the partnership ends. adjusting the item to make it consistent with the

profits and losses (if different from inter- To compute the distributive share of these partnership return. However, except for partnersests in taxable income or loss) and in cash items, the partnership’s tax year is considered in an electing large partnership, this rule will notflow and other nonliquidating distributions. ended on the date the partner disposed of the apply if a partner identifies the different treat-

interest. To avoid an interim closing of the part- ment by filing Form 8082, Notice of Inconsistent• The rights of the partners to distributionsnership books, the partners can agree to esti- Treatment or Administrative Adjustment Re-of capital upon liquidation.mate the distributive share by taking the quest (AAR), with his or her return. prorated amount the partner would have in-

Consolidated audit procedures. In a consol-Varying interests. A change in a partner’s cluded in income if he or she had remained aidated audit proceeding, the tax treatment of anyinterest during the partnership’s tax year re- partner for the entire partnership tax year.partnership item is generally determined at thequires the partner’s distributive share of partner-partnership level rather than at the individualship items to be determined by taking into Self-employment income of deceasedpartner’s level. After the proper treatment is de-account his or her varying interests in the part- partner. A different rule applies in computing atermined at the partnership level, the IRS cannership during the tax year. Partnership items deceased partner’s self-employment income forautomatically make related adjustments to theare allocated to the partner only for the portion of the year of death. The partner’s self-employ-tax returns of the partners, based on their sharethe year in which he or she is a member of the ment income includes the partner’s distributiveof the adjusted items.partnership. share of income earned by the partnership

The consolidated audit procedures do notthrough the end of the month in which theThis rule applies to a partner who sells orapply to electing large partnerships or certainpartner’s death occurs. This is true even thoughexchanges part of an interest in a partnership, orsmall partnerships (with 10 or fewer partners) ifthe deceased partner’s estate or heirs may suc-whose interest is reduced or increased (whetherall partners are one of the following.ceed to the decedent’s rights in the partnership.by entry of a new partner, partial liquidation of a

partner’s interest, gift, additional contributions, For this purpose, partnership income for the • An individual (other than a nonresidentor otherwise). partnership’s tax year in which a partner dies is alien).

considered to be earned equally in each month.• A C corporation.Example. ABC is a calendar year partner-

ship with three partners, Alan, Bob, and Cathy. Example. Larry, a partner in WoodsPar, is a • An estate of a deceased partner.Under the partnership agreement, profits and calendar year taxpayer. WoodsPar’s fiscal year

However, small partnerships can make an elec-losses are shared in proportion to each partner’s ends June 30. For the partnership year endingtion to have these procedures apply.contributions. On January 1 the ratio was 90% June 30, 2003, Larry’s distributive share of part-

for Alan, 5% for Bob, and 5% for Cathy. On nership profits is $2,000. On August 18, 2003,December 1 Bob and Cathy each contributed Larry dies and his estate succeeds to his part- Limits on Lossesadditional amounts. The new profit and loss nership interest. For the partnership year endingsharing ratios were 30% for Alan, 35% for Bob, June 30, 2004, Larry and his estate’s distributive Partner’s adjusted basis. A partner’s distrib-and 35% for Cathy. For its tax year ended De- share is $3,000. utive share of partnership loss is allowed only tocember 31, the partnership had a loss of $1,200. Larry’s self-employment income to be re- the extent of the adjusted basis of the partner’sThis loss occurred equally over the partnership’s ported on Schedule SE (Form 1040) for 2003 is partnership interest. The adjusted basis is fig-tax year. The loss is divided among the partners $2,500. This consists of his $2,000 distributive ured at the end of the partnership’s tax year inas follows: share for the partnership tax year ending June which the loss occurred, before taking the loss

30, 2003, plus $500 (2/12 × $3,000) of the distribu- into account. Any loss more than the partner’sProfit Part tive share for the tax year ending June 30, 2004. adjusted basis is not deductible for that year.or of ShareHowever, any loss not allowed for this reasonLoss Year Total of Reporting Distributive Share will be allowed as a deduction (up to thePartner % x Held x Loss = Losspartner’s basis) at the end of any succeeding

A partner must report his or her distributive year in which the partner increases his or herAlan 90 x 11/12 x $1,200 = $990share of partnership items on his or her tax basis to more than zero. See Basis of Partner’s30 x 1/12 x 1,200 = 30return, whether or not it is actually distributed. Interest, later.(However, a partner’s deduction for his or her

Bob 5 x 11/12 x $1,200 = $55 distributive share of a loss may be limited. See Example. Mike and Joe are equal partners35 x 1/12 x 1,200 = 35 Limits on Losses, later.) These items are re- in a partnership. Mike files his individual return

ported to the partner on Schedule K–1 (Form on a calendar year basis. The partnership return1065). is also filed on a calendar year basis. The part-Cathy 5 x 11/12 x $1,200 = $55

The following discussions explain how partnership incurred a $10,000 loss last year and35 x 1/12 x 1,200 = 35nership items are treated on a partner’s return. Mike’s distributive share of the loss is $5,000.

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The adjusted basis of his partnership interest ally participates is not considered a passive ac- Exclusion limit. The partner’s exclusionbefore considering his share of last year’s loss tivity. An individual partner materially cannot be more than the smaller of the followingwas $2,000. He could claim only $2,000 of the participated in a rental real estate activity if the two amounts.loss on last year’s individual return. The ad- partner was a “real estate professional” for the

1. The partner’s share of the excess (if any)justed basis of his interest at the end of last year tax year. The partner qualifies as a real estateof:was then reduced to zero. professional if he or she met both the following

The partnership showed an $8,000 profit for conditions for the tax year.a. The outstanding principal of the debtthis year. Mike’s $4,000 share of the profit in- • More than half of the personal services the immediately before the cancellation,creases the adjusted basis of his interest by

partner performs in any trade or business over$4,000 (not taking into account the $3,000 ex-are in a real property trade or business incess loss he could not deduct last year). His b. The fair market value (as of that time) ofwhich the partner materially participates.return for this year will show his $4,000 distribu- the property securing the debt, reduced

tive share of this year’s profits and the $3,000 • The partner performs more than 750 hours by the outstanding principal of otherloss not allowable last year. The adjusted basis of services in real property trades or busi- qualified real property business debt se-of his partnership interest at the end of this year nesses in which the partner materially par- cured by that property (as of that time).is $1,000. ticipates.

2. The total adjusted bases of depreciableNot-for-profit activity. Deductions relating to Limited partners. Limited partners are gen- real property held by the partner immedi-an activity not engaged in for profit are limited. erally not considered to materially participate in ately before the cancellation (other thanFor a discussion of the limits, see chapter 1 in trade or business activities conducted through property acquired in contemplation of thePublication 535. partnerships. cancellation).At-risk limits. At-risk rules apply to most trade More information. For more information onor business activities, including activities con- Effect on partner’s basis. Because of off-passive activities, see Publication 925, the in-ducted through a partnership. The at-risk rules setting adjustments, the cancellation of a part-structions for Form 8582 (for individual part-limit a partner’s deductible loss to the amounts nership debt does not usually cause a netners) and the instructions for Form 8810 (forfor which that partner is considered at risk in the change in the basis of a partnership interest.corporate partners).activity. Each partner’s basis is:

A partner is considered at risk for all the Partner’s Exclusions andfollowing amounts. 1. Increased by his or her share of the part-Deductions nership income from the cancellation of• The money and adjusted basis of any

debt (whether or not the partner excludesproperty the partner contributed to the ac- To determine the allowable amount of any ex- the income), andtivity. clusion or deduction subject to a limit, a partner2. Reduced by the deemed distribution result-must combine any separate exclusions or de-• The partner’s share of net income retained

ing from the reduction in his or her share ofductions on his or her income tax return with theby the partnership.partnership liabilities.distributive share of partnership exclusions or

• Certain amounts borrowed by the partner- deductions before applying the limit. (See Adjusted Basis under Basis of Partner’sship for use in the activity if the partner isInterest, later.) The basis of a partner’s interestpersonally liable for repayment or the Cancellation of qualified real property busi-will change only if the partner’s share of incomeamounts borrowed are secured by the ness debt. A partner other than a C corpora-is different from the partner’s share of debt.partner’s property (other than property tion can elect to exclude from gross income the

As explained earlier, however, a partner’sused in the activity). partner’s distributive share of income from can-election to exclude income from the cancellationcellation of the partnership’s qualified real prop-of qualified real property business debt mayA partner is not considered at risk for amounts erty business debt. This is a debt (other than areduce the basis of the partner’s interest to theprotected against loss through guarantees, qualified farm debt) incurred or assumed by theextent the interest is treated as depreciable realstop-loss agreements, or similar arrangements. partnership in connection with real propertyproperty.Nor is the partner at risk for amounts borrowed if used in its trade or business and secured by that

the lender has an interest in the activity (other property. A debt incurred or assumed after 1992 Basis of depreciable real property re-than as a creditor) or is related to a person (other qualifies only if it was incurred or assumed to duced. If the basis of depreciable real prop-than the partner) having such an interest. acquire, construct, reconstruct, or substantially erty is reduced and the property is disposed of,

For more information on determining the improve such property. A debt incurred to refi- then the following rules apply for purposes ofamount at risk, see Publication 925, the instruc- nance a qualified real property business debt determining the ordinary income from recapturetions for Form 6198, At-Risk Limitations, and qualifies, but only up to the refinanced debt. of depreciation under section 1250 of the Inter-the Partner’s Instructions for Schedule K–1 A partner who elects the exclusion must re- nal Revenue Code.(Form 1065). duce the basis of his or her depreciable real

• Any such basis reduction is treated as aproperty by the amount excluded. For this pur-Passive activities. Generally, section 469 of deduction allowed for depreciation.pose, a partnership interest is treated as depre-the Internal Revenue Code limits the amount a ciable real property to the extent of the partner’s • The determination of what would havepartner can deduct for passive activity losses share of the partnership’s depreciable real prop- been the depreciation adjustment underand credits. The passive activity limits do not erty. However, a partnership interest cannot be the straight line method is made as if thereapply to the partnership. Instead, they apply to treated as depreciable real property unless the had been no such reduction.each partner’s share of income, loss, or credit partnership makes a corresponding reduction infrom passive activities. Because the treatment the basis of its depreciable real property with Therefore, the basis reduction recaptured asof each partner’s share of partnership income, respect to that partner. ordinary income is reduced over the time theloss, or credit depends on the nature of the To elect the exclusion, the partner must file partnership continues to hold the property, asactivity that generated it, the partnership must Form 982, Reduction of Tax Attributes Due to the partnership forgoes depreciation deductionsreport income, loss, and credits separately for Discharge of Indebtedness, with his or her origi- due to the basis reduction.each activity. nal income tax return. However, if the partner

Generally, passive activities include a trade timely filed the return without making the elec- Section 179 deduction. A partnership canor business activity in which the partner does not tion, he or she can still make the election by filing elect to deduct all or part of the cost of certainmaterially participate. The level of each an amended return within six months of the due assets under section 179 of the Internal Reve-partner’s participation must be determined by date of the original return (excluding exten- nue Code. The deduction is passed through tothe partner. sions). The election must be attached to the the partners as a separately stated item.Rental activities. Generally, passive activi- amended return with “Filed pursuant to section

Limits. The section 179 deduction is sub-ties also include rental activities, regardless of 301.9100–2” written on the election statement.ject to certain limits that apply to the partnershipthe partner’s participation. However, a rental The amended return should be filed at the sameand to each partner. The partnership determinesreal estate activity in which the partner materi- address as the original return.

Page 8



its section 179 deduction subject to the limits. It partnership agreement requires the partner to • Unrealized receivables or substantially ap-then allocates the deduction among its partners. pay the expenses. These expenses are usually preciated inventory items distributed in ex-

Each partner adds the amount allocated considered incurred and deductible by the part- change for any part of the partner’sfrom the partnership (shown on Schedule K–1) nership. interest in other partnership property, in-to his or her other nonpartnership section 179 If an employee of the partnership performs cluding money.costs and then applies the maximum dollar limit part of a partner’s duties and the partnership

• Other property (including money) distrib-to this total. To determine if a partner has ex- agreement requires the partner to pay the em-uted in exchange for any part of aceeded the $400,000 investment limit, the part- ployee out of personal funds, the partner canpartner’s interest in unrealized receivablesner does not include any of the cost of section deduct the payment as a business expense.or substantially appreciated inventory179 property placed in service by the partner-

Interest expense for distributed loan. If the items.ship. After the maximum dollar limit and invest-partnership distributes borrowed funds to a part-ment limit are applied, the remaining cost of thener, the partnership should list the partner’s See Payments for Unrealized Receivablespartnership and nonpartnership section 179share of interest expense for these funds as and Inventory Items under Disposition ofproperty is subject to the taxable income limit.“Interest expense allocated to debt-financed dis- Partner’s Interest, later.Figuring partnership’s taxable income. tributions” under “Other deductions” on the This treatment does not apply to the follow-For purposes of the taxable income limit, taxable partner’s Schedule K–1. The partner deducts ing distributions.income of a partnership is figured by adding this interest on his or her tax return depending

together the net income (or loss) from all trades • A distribution of property to the partneron how the partner uses the funds. See chapteror businesses actively conducted by the partner- who contributed the property to the part-5 in Publication 535 for more information on theship during the tax year. nership.allocation of interest expense related to debt-fi-

nanced distributions.Figuring partner’s taxable income. For • Payments made to a retiring partner orpurposes of the taxable income limit, the taxable successor in interest of a deceased part-Debt-financed acquisitions. The interest ex-income of a partner who is engaged in the active ner that are the partner’s distributive sharepense on loan proceeds used to purchase anconduct of one or more of a partnership’s trades of partnership income or guaranteed pay-interest in, or make a contribution to, a partner-or businesses includes his or her allocable ments.ship must be allocated as explained in chapter 5share of taxable income derived from the of Publication 535.

Substantially appreciated inventory items.partnership’s active conduct of any trade orInventory items of the partnership are consid-business.ered to have appreciated substantially in value

Basis adjustment. A partner who is allo- if, at the time of the distribution, their total fairPartnershipcated section 179 expenses from the partner- market value is more than 120% of theship must reduce the basis of his or her partnership’s adjusted basis for the property.Distributionspartnership interest by the total section 179 ex- However, if a principal purpose for acquiringpenses allocated, regardless of whether the full inventory property is to avoid ordinary incomePartnership distributions include the following.amount allocated can be currently deducted. treatment by reducing the appreciation to lessSee Adjusted Basis under Basis of Partner’s • A withdrawal by a partner in anticipation of than 120%, that property is excluded.Interest, later. If a partner disposes of his or her the current year’s earnings.interest in a partnership, the partner’s basis for • A distribution of the current year’s or prior Partner’s Gain or Lossdetermining gain or loss is increased by any

years’ earnings not needed for workingoutstanding carryover of disallowed deductionsA partner generally recognizes gain on a part-capital.of section 179 expenses allocated from the part-nership distribution only to the extent any moneynership. • A complete or partial liquidation of a (and marketable securities treated as money)The basis of a partnership’s section 179 partner’s interest. included in the distribution exceeds the adjustedproperty must be reduced by the section 179basis of the partner’s interest in the partnership.• A distribution to all partners in a completededuction elected by the partnership. This re-Any gain recognized is generally treated as cap-liquidation of the partnership.duction of basis must be made even if any part-ital gain from the sale of the partnership interestner cannot deduct his or her entire allocableon the date of the distribution. If partnershipA partnership distribution is not taken intoshare of the section 179 deduction because ofproperty (other than marketable securitiesaccount in determining the partner’s distributivethe limits.treated as money) is distributed to a partner, heshare of partnership income or loss. If any gain

More information. See Publication 946 for or she generally does not recognize any gainor loss from the distribution is recognized by themore information on the section 179 deduction. until the sale or other disposition of the property.partner, it must be reported on his or her return

For exceptions to these rules, see Distribu-for the tax year in which the distribution is re-Amortization deduction for reforestation tion of partner’s debt and Net precontributionceived. Money or property withdrawn by a part-costs. A partnership can elect to amortize cer- gain, later. Also, see Payments for Unrealizedner in anticipation of the current year’s earningstain reforestation costs for qualified timber prop- Receivables and Inventory Items under Disposi-is treated as a distribution received on the lasterty over an 84-month period. The amortizable tion of Partner’s Interest, later.day of the partnership’s tax year.costs are passed through to the partners as a

Effect on partner’s basis. A partner’s ad-separately stated item. Example. The adjusted basis of Jo’s part-justed basis in his or her partnership interest is nership interest is $14,000. She receives a dis-Annual limit. The election can be made for decreased (but not below zero) by the money tribution of $8,000 cash and land that has anno more than $10,000 of qualified costs each tax and adjusted basis of property distributed to the adjusted basis of $2,000 and a fair market valueyear. Both the partnership and partner are sub- partner. See Adjusted Basis under Basis of of $3,000. Because the cash received does notject to this limit. The partnership applies the Partner’s Interest, later. exceed the basis of her partnership interest, Jo$10,000 limit in determining the amount of its

does not recognize any gain on the distribution.Effect on partnership. A partnership gener-amortizable costs and allocates that amountAny gain on the land will be recognized whenally does not recognize any gain or loss becauseamong its partners. The partner adds theshe sells or otherwise disposes of it. The distri-of distributions it makes to partners. The part-amount allocated from the partnership to his orbution decreases the adjusted basis of Jo’s part-nership may be able to elect to adjust the basisher qualified costs from other sources and thennership interest to $4,000 [$14,000 − ($8,000 +of its undistributed property, as explained laterapplies the $10,000 limit ($5,000 limit, if married$2,000)].under Adjusting the Basis of Partnership Prop-filing a separate return).

erty. Marketable securities treated as money.More information. See chapter 9 of Publi-Certain distributions treated as a sale or ex- Generally, a marketable security distributed to acation 535 for more information.change. When a partnership distributes the partner is treated as money in determining

Partnership expenses paid by partner. In following items, the distribution may be treated whether gain is recognized on the distribution.general, a partner cannot deduct partnership as a sale or exchange of property rather than a This treatment, however, does not generally ap-expenses paid out of personal funds unless the distribution. ply if that partner contributed the security to the

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partnership or an investment partnership made Example 1. The adjusted basis of Beth’s1. The excess of:the distribution to an eligible partner. partnership interest is $30,000. She receives a

The amount treated as money is the distribution of property that has an adjusted ba-a. The fair market value of the propertysecurity’s fair market value when distributed, sis of $20,000 to the partnership and $4,000 inreceived in the distribution, overreduced (but not below zero) by the excess (if cash. Her basis for the property is $20,000.

b. The adjusted basis of the partner’s in-any) of:Example 2. The adjusted basis of Mike’sterest in the partnership immediately

1. The partner’s distributive share of the gain partnership interest is $10,000. He receives abefore the distribution, reduced (but notthat would be recognized had the partner- distribution of $4,000 cash and property that hasbelow zero) by any money received inship sold all its marketable securities at an adjusted basis to the partnership of $8,000.the distribution.their fair market value immediately before His basis for the distributed property is limited tothe transaction resulting in the distribution, $6,000 ($10,000 − $4,000, the cash he re-2. The “net precontribution gain” of the part-over ceives).ner. This is the net gain the partner would

recognize if all the property contributed by2. The partner’s distributive share of the gainComplete liquidation of partner’s interest.the partner within 7 years (5 years forthat would be recognized had the partner-The basis of property received in complete liqui-ship sold all such securities it still held after property contributed before June 9, 1997)dation of a partner’s interest is the adjustedthe distribution at the fair market value in of the distribution, and held by the partnerbasis of the partner’s interest in the partnership(1). ship immediately before the distribution, reduced by any money distributed to the partner

were distributed to another partner, otherFor more information, including the definition in the same transaction.than a partner who owns more than 50%of marketable securities, see section 731(c) ofof the partnership. For information about Partner’s holding period. A partner’s holdingthe Internal Revenue Code.the distribution of contributed property to period for property distributed to the partner in-another partner, see Contribution of Prop-Loss on distribution. A partner does not rec- cludes the period the property was held by theerty, under Transactions Between Partner-ognize loss on a partnership distribution unless partnership. If the property was contributed toship and Partners, later.all the following requirements are met. the partnership by a partner, then the period it

was held by that partner is also included.The character of the gain is determined by• The adjusted basis of the partner’s interestin the partnership exceeds the distribution. reference to the character of the net precontribu- Basis divided among properties. If the basis

tion gain. This gain is in addition to any gain the of property received is the adjusted basis of the• The partner’s entire interest in the partner-partner must recognize if the money distributed partner’s interest in the partnership (reduced byship is liquidated.is more than his or her basis in the partnership. money received in the same transaction), it must• The distribution is in money, unrealized re- For these rules, the term “money” includes be divided among the properties distributed to

ceivables, or inventory items. marketable securities treated as money, as dis- the partner. For property distributed after Augustcussed earlier. 5, 1997, allocate the basis using the following

There are exceptions to these general rules. rules. Effect on basis. The adjusted basis of theSee the following discussions. Also, see Liqui-partner’s interest in the partnership is increaseddation at Partner’s Retirement or Death under 1. Allocate the basis first to unrealized receiv-by any net precontribution gain recognized byDisposition of Partner’s Interest, later. ables and inventory items included in thethe partner. Other than for purposes of deter- distribution by assigning a basis to each

Distribution of partner’s debt. If a partner- mining the gain, the increase is treated as occur- item equal to the partnership’s adjustedship acquires a partner’s debt and extinguishes ring immediately before the distribution. See basis in the item immediately before thethe debt by distributing it to the partner, the Basis of Partner’s Interest, later. distribution. If the total of these assignedpartner will recognize capital gain or loss to the The partnership must adjust its basis in any bases exceeds the allocable basis, de-extent the fair market value of the debt differs property the partner contributed within 7 years crease the assigned bases by the amountfrom the basis of the debt (determined under the (5 years for property contributed before June 9, of the excess.rules discussed in Partner’s Basis for Distributed 1997) of the distribution to reflect any gain that

2. Allocate any remaining basis to propertiesProperty, later). partner recognizes under this rule.other than unrealized receivables and in-The partner is treated as having satisfied the

Exceptions. Any part of a distribution that is ventory items by assigning a basis to eachdebt for its fair market value. If the issue priceproperty the partner previously contributed to property equal to the partnership’s ad-(adjusted for any premium or discount) of the

justed basis in the property immediatelythe partnership is not taken into account in de-debt exceeds its fair market value when distrib-before the distribution. If the allocable ba-termining the amount of the excess distributionuted, the partner may have to include the excesssis exceeds the total of these assigned ba-or the partner’s net precontribution gain. For thisamount in income as canceled debt.ses, increase the assigned bases by thepurpose, the partner’s previously contributedSimilarly, a deduction may be available to aamount of the excess. If the total of theseproperty does not include a contributed interestcorporate partner if the fair market value of theassigned bases exceeds the allocable ba-debt at the time of distribution exceeds its ad- in an entity to the extent its value is due tosis, decrease the assigned bases by thejusted issue price. property contributed to the entity after the inter-amount of the excess.est was contributed to the partnership.

Net precontribution gain. A partner gener- Recognition of gain under this rule also doesally must recognize gain on the distribution of Allocating a basis increase. Allocate anynot apply to a distribution of unrealized receiv-property (other than money) if the partner con- basis increase required in rule (2), above, first toables or substantially appreciated inventorytributed appreciated property to the partnership properties with unrealized appreciation to theitems if the distribution is treated as a sale orduring the 7-year period before the distribution. extent of the unrealized appreciation. (If the ba-exchange, as discussed earlier.

sis increase is less than the total unrealizedA 5-year period applies to propertyappreciation, allocate it among those propertiescontributed before June 9, 1997, or Partner’s Basis for in proportion to their respective amounts of un-under a written binding contract:CAUTION

!Distributed Property realized appreciation.) Allocate any remaining

basis increase among all the properties in pro-Unless there is a complete liquidation of a portion to their respective fair market values.1. That was in effect on June 8, 1997, andpartner’s interest, the basis of property (otherat all times thereafter before the contri-than money) distributed to the partner by a part- Example. Julie’s basis in her partnership in-bution, andnership is its adjusted basis to the partnership terest is $55,000. In a distribution in liquidation

2. That provides for the contribution of a immediately before the distribution. However, of her entire interest, she receives properties Afixed amount of property. the basis of the property to the partner cannot be and B, neither of which is inventory or unrealized

more than the adjusted basis of his or her inter- receivables. Property A has an adjusted basis toest in the partnership reduced by any moneyThe gain recognized is the lesser of the fol- the partnership of $5,000 and a fair market value

lowing amounts. received in the same transaction. of $40,000. Property B has an adjusted basis to

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the partnership of $10,000 and a fair market tory items distributed, and if no other property is The total to be allocated among the proper-value of $10,000. distributed to which the partner can apply the ties Bob received in the distribution is $15,500

remaining basis, the partner has a capital loss to ($17,000 basis of his interest − $1,500 cashTo figure her basis in each property, Juliethe extent of the remaining basis of the partner- received). His basis in the inventory items isfirst assigns bases of $5,000 to property A andship interest. $4,000 ($3,500 partnership basis + $500 special$10,000 to property B (their adjusted bases to

adjustment). The remaining $11,500 is allocatedthe partnership). This leaves a $40,000 basisSpecial adjustment to basis. A partner who to his new basis for the other property he re-increase (the $55,000 allocable basis minus theacquired any part of his or her partnership inter- ceived.$15,000 total of the assigned bases). She firstest in a sale or exchange or upon the death ofallocates $35,000 to property A (its unrealized Mandatory adjustment. A partner does notanother partner may be able to choose a specialappreciation). The remaining $5,000 is allocated always have a choice of making this specialbasis adjustment for property distributed by thebetween the properties based on their fair mar- adjustment to basis. The special adjustment topartnership. To choose the special adjustment,ket values. $4,000 ($40,000/$50,000) is allo- basis must be made for a distribution of prop-the partner must have received the distributioncated to property A and $1,000 ($10,000/ erty, (whether or not within 2 years after thewithin 2 years after acquiring the partnership$50,000) is allocated to property B. Julie’s basis partnership interest was acquired) if all the fol-interest. Also, the partnership must not havein property A is $44,000 ($5,000 + $35,000 + lowing conditions existed when the partner re-chosen the optional adjustment to basis, dis-$4,000) and her basis in property B is $11,000 ceived the partnership interest.cussed later under Adjusting the Basis of Part-($10,000 + $1,000).nership Property, when the partner acquired the • The fair market value of all partnership

Allocating a basis decrease. Use the fol- partnership interest. property (other than money) was morelowing rules to allocate any basis decrease re- If a partner chooses this special basis adjust- than 110% of its adjusted basis to thequired in rule (1) or rule (2), earlier. ment, the partner’s basis for the property distrib- partnership.

uted is the same as it would have been if the • If there had been a liquidation of the1. Allocate the basis decrease first to items partnership had chosen the optional adjustmentpartner’s interest immediately after it waswith unrealized depreciation to the extent to basis. However, this assigned basis is notacquired, an allocation of the basis of thatof the unrealized depreciation. (If the basis reduced by any depletion or depreciation thatinterest under the general rules (discusseddecrease is less than the total unrealized would have been allowed or allowable if theearlier under Basis divided among proper-depreciation, allocate it among those items partnership had previously chosen the optionalties) would have decreased the basis ofin proportion to their respective amounts of adjustment.property that could not be depreciated, de-unrealized depreciation.)

The choice must be made with the partner’s pleted, or amortized and increased the ba-2. Allocate any remaining basis decrease tax return for the year of the distribution if the sis of property that could be.

among all the items in proportion to their distribution includes any property subject to de-• The optional basis adjustment, if it hadrespective assigned basis amounts (as depreciation, depletion, or amortization. If the

been chosen by the partnership, wouldcreased in (1)). choice does not have to be made for the distribu-have changed the partner’s basis for thetion year, it must be made with the return for theproperty actually distributed.first year in which the basis of the distributedExample. Tom’s basis in his partnership in-

property is pertinent in determining the partner’sterest is $20,000. In a distribution in liquidationincome tax. Required statement. Generally, if a partnerof his entire interest, he receives properties C

A partner choosing this special basis adjust- chooses a special basis adjustment and notifiesand D, neither of which is inventory or unrealizedment must attach a statement to his or her tax the partnership, or if the partnership makes areceivables. Property C has an adjusted basis toreturn that the partner chooses under section distribution for which the special basis adjust-the partnership of $15,000 and a fair market732(d) of the Internal Revenue Code to adjust ment is mandatory, the partnership must providevalue of $15,000. Property D has an adjustedthe basis of property received in a distribution. a statement to the partner. The statement mustbasis to the partnership of $15,000 and a fairThe statement must show the computation of provide information necessary for the partner tomarket value of $5,000.the special basis adjustment for the property compute the special basis adjustment.To figure his basis in each property, Tom firstdistributed and list the properties to which theassigns bases of $15,000 to property C andadjustment has been allocated. Marketable securities. A partner’s basis in$15,000 to property D (their adjusted bases to

marketable securities received in a partnershipthe partnership). This leaves a $10,000 basisExample. Bob purchased a 25% interest in distribution, as determined in the preceding dis-decrease (the $30,000 total of the assigned ba-

X partnership for $17,000 cash. At the time of cussions, is increased by any gain recognizedses minus the $20,000 allocable basis). He allo-the purchase, the partnership owned inventory by treating the securities as money. See Market-cates the entire $10,000 to property D (itshaving a basis to the partnership of $14,000 and able securities treated as money underunrealized depreciation). Tom’s basis in prop-a fair market value of $16,000. Thus, $4,000 of Partner’s Gain or Loss, earlier. The basis in-erty C is $15,000 and his basis in property D isthe $17,000 he paid was attributable to his share crease is allocated among the securities in pro-$5,000 ($15,000 − $10,000).of inventory with a basis to the partnership of portion to their respective amounts of unrealized

Distributions before August 6, 1997. For $3,500. appreciation before the basis increase.property distributed before August 6, 1997, allo- Within 2 years after acquiring his interest,cate the basis using the following rules. Bob withdrew from the partnership and for his

entire interest received cash of $1,500, inven-1. Allocate the basis first to unrealized receiv- tory with a basis to the partnership of $3,500, Transactions Betweenables and inventory items included in the and other property with a basis of $6,000. The

distribution to the extent of the value of the inventory received was 25% of the Partnership andpartnership’s adjusted basis in those value of all partnership inventory. (It is immate-items. If the partnership’s adjusted basis in rial whether the inventory he received was on Partnersthose items exceeded the allocable basis, hand when he acquired his interest.)allocate the basis among the items in pro- For certain transactions between a partner andSince the partnership from which Bob with-portion to their adjusted bases to the part- his or her partnership, the partner is treated asdrew did not make the optional adjustment tonership. not being a member of the partnership. Thesebasis, he chose to adjust the basis of the inven-

transactions include the following.tory received. His share of the partnership’s ba-2. Allocate any remaining basis to other dis-sis for the inventory is increased by $500 (25%tributed properties in proportion to their ad-

1. Performing services for or transferringof the $2,000 difference between the $16,000justed bases to the partnership.property to a partnership if—fair market value of the inventory and its $14,000

Partner’s interest more than partnership basis to the partnership at the time he acquireda. There is a related allocation and distri-basis. If the basis of a partner’s interest to be his interest). The adjustment applies only for

bution to a partner, anddivided in a complete liquidation of the partner’s purposes of determining his new basis in theinterest is more than the partnership’s adjusted inventory, and not for purposes of partnership b. The entire transaction, when viewed to-basis for the unrealized receivables and inven- gain or loss on disposition. gether, is properly characterized as oc-

Page 11



curring between the partnership and a If the partnership net income had been If the sale or exchange is between two part-partner not acting in the capacity of a $30,000, there would have been no guaranteed nerships in which the same persons directly orpartner. payment since her share, without regard to the indirectly own more than 50% of the capital or

guarantee, would have been greater than the profits interests in each partnership, no deduc-2. Transferring money or other property to a guarantee. tion of a loss is allowed.

partnership if— The basis of each partner’s interest in theSelf-employed health insurance premiums.partnership is decreased (but not below zero) byPremiums for health insurance paid by a part-a. There is a related transfer of money orthe partner’s share of the disallowed loss.nership on behalf of a partner for services as aother property by the partnership to the

If the purchaser later sells the property, onlypartner are treated as guaranteed payments.contributing partner or another partner,the gain realized that is greater than the loss notThe partnership can deduct the payments as aandallowed will be taxable. If any gain from the salebusiness expense and the partner must include

b. The transfers together are properly of the property is not recognized because of thisthem in gross income. However, if the partner-characterized as a sale or exchange of rule, the basis of each partner’s interest in theship accounts for insurance paid for a partner asproperty. partnership is increased by the partner’s sharea reduction in distributions to the partner, the

of that gain.partnership cannot deduct the premiums.For 2003, a partner who qualifies can deductPayments by accrual basis partnership to

100% of the health insurance premiums paid by Gains. Gains are treated as ordinary incomecash basis partner. A partnership that usesthe partnership on his or her behalf as an adjust- in a sale or exchange of property directly oran accrual method of accounting cannot deductment to income. The partner cannot deduct the indirectly between a person and a partnership,any business expense owed to a cash basispremiums for any calendar month or part of a or between two partnerships, if both of the fol-partner until the amount is paid. However, thismonth in which the partner is eligible to partici- lowing tests are met.rule does not apply to guaranteed paymentspate in any subsidized health plan maintainedmade to a partner, which are generally deducti- • More than 50% of the capital or profitsby any employer of the partner or the partner’sble when accrued.

interest in the partnership(s) is directly orspouse. For more information on the self-em-indirectly owned by the same person(s).ployed health insurance deduction, see chapterGuaranteed Payments 7 in Publication 535. • The property in the hands of the trans-

Guaranteed payments are those made by a feree immediately after the transfer is notIncluding payments in partner’s income.partnership to a partner that are determined a capital asset. Property that is not a capi-Guaranteed payments are included in income inwithout regard to the partnership’s income. A tal asset includes accounts receivable, in-the partner’s tax year in which the partnership’spartnership treats guaranteed payments for ventory, stock-in-trade, and depreciable ortax year ends.services, or for the use of capital, as if they were real property used in a trade or business.made to a person who is not a partner. This Example 1. Under the terms of a partner-treatment is for purposes of determining gross ship agreement, Erica is entitled to a fixed an- More than 50% ownership. To determine ifincome and deductible business expenses only. nual payment of $10,000 without regard to the there is more than 50% ownership in partnershipFor other tax purposes, guaranteed payments income of the partnership. Her distributive share capital or profits, the following rules apply.are treated as a partner’s distributive share of of the partnership income is 10%. The partner-ordinary income. Guaranteed payments are not ship has $50,000 of ordinary income after de- 1. An interest directly or indirectly owned bysubject to income tax withholding. ducting the guaranteed payment. She must or for a corporation, partnership, estate, orThe partnership generally deducts guaran- include ordinary income of $15,000 ($10,000 trust is considered to be owned proportion-teed payments on line 10 of Form 1065 as a guaranteed payment + $5,000 ($50,000 × 10%) ately by or for its shareholders, partners, orbusiness expense. They are also listed on distributive share) on her individual income tax beneficiaries.Schedules K and K–1 of the partnership return. return for her tax year in which the partnership’sThe individual partner reports guaranteed pay- 2. An individual is considered to own the in-tax year ends.ments on Schedule E (Form 1040) as ordinary terest directly or indirectly owned by or forincome, along with his or her distributive share the individual’s family. For this rule, “fam-Example 2. Mike is a calendar year tax-of the partnership’s other ordinary income. ily” includes only brothers, sisters,payer who is a partner in a partnership. The

Guaranteed payments made to partners for half-brothers, half-sisters, spouses, ances-partnership uses a fiscal year that ended Janu-organizing the partnership or syndicating inter- ary 31, 2003. Mike received guaranteed pay- tors, and lineal descendants.ests in the partnership are capital expenses and ments from the partnership from February 1, 3. If a person is considered to own an interestare not deductible by the partnership. (See Or- 2002, until December 31, 2002. He must include

using rule (1), that person (the “construc-ganization expenses and syndication fees under these guaranteed payments in income for 2003tive owner”) is treated as if actually owningPartnership Income or Loss (Form 1065 Only), and report them on his 2003 income tax return.that interest when rules (1) and (2) areearlier). However, these payments must be in-

Payments resulting in loss. If guaranteed applied. However, if a person is consid-cluded in the partners’ individual income taxpayments to a partner result in a partnership ered to own an interest using rule (2), thatreturns.loss in which the partner shares, the partner person is not treated as actually owningmust report the full amount of the guaranteedMinimum payment. If a partner is to receive a that interest in reapplying rule (2) to makepayments as ordinary income. The partner sep-minimum payment from the partnership, the another person the constructive owner.arately takes into account his or her distributiveguaranteed payment is the amount by which theshare of the partnership loss, to the extent of theminimum payment is more than the partner’s

Example. Individuals A and B and Trust Tadjusted basis of the partner’s partnership inter-distributive share of the partnership incomeare equal partners in Partnership ABT. A’s hus-est.before taking into account the guaranteed pay-band, AH, is the sole beneficiary of Trust T.ment.Trust T’s partnership interest will be attributed toSale or Exchange AH only for the purpose of further attributing theExample. Under a partnership agreement, of Property interest to A. As a result, A is a more-than-50%Sandy is to receive 30% of the partnership in-partner. This means that any deduction forcome, but not less than $8,000. The partnership Special rules apply to a sale or exchange of losses on transactions between her and ABT willhas net income of $20,000. Sandy’s share, with- property between a partnership and certain per- not be allowed, and gain from property that inout regard to the minimum guarantee, is $6,000 sons. the hands of the transferee is not a capital asset(30% × $20,000). The guaranteed payment thatis treated as ordinary, rather than capital, gain.can be deducted by the partnership is $2,000 Losses. Losses will not be allowed from a sale

($8,000 − $6,000). Sandy’s income from the or exchange of property (other than an interestMore information. For more information onpartnership is $8,000, and the remaining in the partnership) directly or indirectly betweenthese special rules, see Sales and Exchanges$12,000 of partnership income will be reported a partnership and a person whose direct or indi-Between Related Persons in chapter 2 of Publi-by the other partners in proportion to their rect interest in the capital or profits of the part-

shares under the partnership agreement. nership is more than 50%. cation 544.

Page 12



partnership that would be treated as an invest- depletion allowable to the partnership or theContribution of Propertyment company if it were incorporated. gain or loss realized by the partnership.

A partnership is generally treated as an in-Usually, neither the partner nor the partnershipExample. Sara and Gail formed an equalvestment company if over 80% of the value of itsrecognizes a gain or loss when property is con-

partnership. Sara contributed $10,000 in cash toassets is held for investment and consists oftributed to the partnership in exchange for athe partnership and Gail contributed depreciablecertain readily marketable items. These itemspartnership interest. This applies whether a part-property with a fair market value of $10,000 andinclude money, stocks and other equity interestsnership is being formed or is already operating.

in a corporation, and interests in regulated in- an adjusted basis of $4,000. The partnership’sThe partnership’s holding period for the propertyvestment companies and real estate investment basis for depreciation is limited to the adjustedincludes the partner’s holding period.trusts. For more information, see section basis of the property in Gail’s hands, $4,000.The contribution of limited partnership inter-351(e)(1) of the Internal Revenue Code and theests in one partnership for limited partnership In effect, Sara purchased an undividedrelated regulations. Whether a partnership is aninterests in another partnership qualifies as a one-half interest in the depreciable property withinvestment company under this test is ordinarilytax-free contribution of property to the second her contribution of $10,000. Assuming that thedetermined immediately after the transfer ofpartnership if the transaction is made for busi- depreciation rate is 10% a year under the Gen-property.ness purposes. The exchange is not subject to eral Depreciation System (GDS), she would

This rule applies to limited partnerships andthe rules explained later under Disposition of have been entitled to a depreciation deductiongeneral partnerships, regardless of whetherPartner’s Interest. of $500 per year, based on her interest in thethey are privately formed or publicly syndicated. partnership, if the adjusted basis of the property

Disguised sales. A contribution of money or equaled its fair market value when contributed.Contribution to foreign partnership. A do-other property to the partnership followed by a (To simplify this example, the depreciation de-mestic partnership that contributed property af-distribution of different property from the part- ductions are determined without regard to anyter August 5, 1997, to a foreign partnership innership to the partner is treated not as a contri- first-year depreciation conventions.)exchange for a partnership interest may have tobution and distribution, but as a sale of property, However, since the partnership is allowedfile Form 8865 if either of the following apply.if both of the following tests are met. only $400 per year of depreciation (10% of1. Immediately after the contribution, the part- $4,000), no more than $400 can be allocated• The distribution would not have been

nership owned, directly or indirectly, at between the partners. The entire $400 must bemade but for the contribution.least a 10% interest in the foreign partner- allocated to Sara.• The partner’s right to the distribution does ship.

not depend on the success of partnership Distribution of contributed property to an-2. The fair market value of the property con-operations. other partner. If a partner contributes prop-tributed to the foreign partnership, whenerty to a partnership and the partnershipadded to other contributions of propertyAll facts and circumstances are considered indistributes the property to another partner withinmade to the partnership during the preced-determining if the contribution and distribution7 years of the contribution, the contributing part-ing 12-month period, is greater thanare more properly characterized as a sale. How-ner must recognize gain or loss on the distribu-$100,000.ever, if the contribution and distribution occurtion.within 2 years of each other, the transfers are The partnership may also have to file Form

presumed to be a sale unless the facts clearly A 5-year period applies to property8865, even if no contributions are made duringindicate that the transfers are not a sale. If the contributed before June 9, 1997, orthe tax year, if it owns a 10% or more interest incontribution and distribution occur more than 2 under a written binding contract:CAUTION

!a foreign partnership at any time during the year.

years apart, the transfers are presumed not to See the form instructions for more information.be a sale unless the facts clearly indicate that

1. That was in effect on June 8, 1997, andBasis of contributed property. If a partnerthe transfers are a sale.at all times thereafter before the contri-contributes property to a partnership, the

Form 8275 required. A partner must attach bution, andpartnership’s basis for determining depreciation,Form 8275, Disclosure Statement, (or other depletion, and gain or loss for the property is the 2. That provides for the contribution of astatement) to his or her return if the partner same as the partner’s adjusted basis for the fixed amount of property.contributes property to a partnership and, within property when it was contributed, increased by2 years (before or after the contribution), the any gain recognized by the partner at the time ofpartnership transfers money or other considera- The recognized gain or loss is the amountcontribution.tion to the partner. For exceptions to this require- the contributing partner would have recognizedment, see section 1.707 – 3(c)(2) of the if the property had been sold for its fair marketAllocations to account for built-in gain orregulations. value when it was distributed. This amount is theloss. The fair market value of property at the

A partnership must attach Form 8275 (or difference between the property’s basis and itstime it is contributed may be different from theother statement) to its return if it distributes prop- fair market value at the time of contribution. Thepartner’s adjusted basis. The partnership musterty to a partner, and, within 2 years (before or character of the gain or loss will be the same asallocate among the partners any income, deduc-after the distribution), the partner transfers the character of the gain or loss that would havetion, gain, or loss on the property in a mannermoney or other consideration to the partnership. resulted if the partnership had sold the propertythat will account for the difference. This rule also

to the distributee partner. Appropriate adjust-applies to contributions of accounts payable andForm 8275 must include the following infor-ments must be made to the adjusted basis of theother accrued but unpaid items of a cash basismation.contributing partner’s partnership interest and topartner.• A caption identifying the statement as a the adjusted basis of the property distributed toThe partnership can use different allocation

disclosure under section 707 of the Inter- reflect the recognized gain or loss.methods for different items of contributed prop-nal Revenue Code. erty. A single reasonable method must be con-

sistently applied to each item, and the overall• A description of the transferred property or Disposition of certain contributed property.method or combination of methods must be rea-money, including its value. The following rules determine the character ofsonable. See section 1.704–3 of the regulations the partnership’s gain or loss on a disposition of• A description of any relevant facts in de- for allocation methods generally considered rea- certain types of contributed property. termining if the transfers are properly sonable.

viewed as a disguised sale. (See section 1. Unrealized receivables. If the propertyIf the partnership sells contributed property1.707–3(b)(2) of the regulations for a was an unrealized receivable in the handsand recognizes gain or loss, built-in gain or lossdescription of the facts and circumstances of the contributing partner, any gain or lossis allocated to the contributing partner. If contrib-considered in determining if the transfers on its disposition by the partnership is ordi-uted property is subject to depreciation or otherare a disguised sale.) nary income or loss. Unrealized receiv-cost recovery, the allocation of deductions for

ables are defined later under Payments forthese items takes into account built-in gain orUnrealized Receivables and InventoryContribution to investment company. Gain loss on the property. However, the total depreci-Items. When reading the definition, substi-is recognized when property is contributed (in ation, depletion, gain, or loss allocated to part-tute “partner” for “partnership.”exchange for an interest in the partnership) to a ners cannot be more than the depreciation or

Page 13



2. Inventory items. If the property was an A profits interest transferred as compensation interest is reduced (but not below zero) by thefor services is not subject to the rules for re- liability assumed by the other partners. Thisinventory item in the hands of the contrib-stricted property that apply to capital interests. partner must reduce his or her basis becauseuting partner, any gain or loss on its dispo-

the assumption of the liability is treated as asition by the partnership within 5 yearsdistribution of money to that partner. The otherafter the contribution is ordinary income orpartners’ assumption of the liability is treated asloss. Inventory items are defined later ina contribution by them of money to the partner-Basis of Partner’sPayments for Unrealized Receivables andship. See Effect of Partnership Liabilities, later.Inventory Items. Interest

3. Capital loss property. If the property was Example 1. John acquired a 20% interest ina capital asset in the contributing partner’s a partnership by contributing property that hadThe basis of a partnership interest is the moneyhands, any loss on its disposition by the an adjusted basis to him of $8,000 and a $4,000plus the adjusted basis of any property the part-partnership within 5 years after the contri- mortgage. The partnership assumed payment ofner contributed. If the partner must recognize

the mortgage. The basis of John’s interest is:bution is a capital loss. The capital loss is gain as a result of the contribution, this gain islimited to the amount by which the included in the basis of his or her interest. Any

Adjusted basis of contributed property $8,000increase in a partner’s individual liabilities be-partner’s adjusted basis for the propertycause of an assumption of partnership liabilitiesexceeded the property’s fair market value Minus: Part of mortgage assumed byis considered a contribution of money to theimmediately before the contribution. other partners (80% × $4,000) . . . . . . 3,200partnership by the partner.

Basis of John’s partnership interest . . . $4,8004. Substituted basis property. If the dispo-sition of any of the property listed in (1), Interest acquired by gift, etc. If a partner(2), or (3) is a nonrecognition transaction, acquires an interest in a partnership by gift, Example 2. If, in Example 1, the contributedthese rules apply when the recipient of the inheritance, or under any circumstance other property had a $12,000 mortgage, the basis ofproperty disposes of any substituted basis than by a contribution of money or property to John’s partnership interest would be zero. Theproperty (other than certain corporate the partnership, the partner’s basis must be de- $1,600 difference between the mortgage as-stock) resulting from the transaction. termined using the basis rules described in Pub- sumed by the other partners, $9,600 (80% ×

lication 551. $12,000), and his basis of $8,000 would betreated as capital gain from the sale or exchangeContribution of Services of a partnership interest. However, this gainAdjusted Basiswould not increase the basis of his partnershipA partner can acquire an interest in partnership

The basis of an interest in a partnership is in- interest.capital or profits as compensation for services creased or decreased by certain items.performed or to be performed. Book value of partner’s interest. The ad-

justed basis of a partner’s interest is determinedIncreases. A partner’s basis is increased byCapital interest. A capital interest is an inter- without considering any amount shown in thethe following items.

partnership books as a capital, equity, or similarest that would give the holder a share of the • The partner’s additional contributions to account.proceeds if the partnership’s assets were sold atthe partnership, including an increasedfair market value and the proceeds were distrib-share of or assumption of partnership lia- Example. Sam contributes to his partner-uted in a complete liquidation of the partnership.bilities. ship property that has an adjusted basis of $400This determination generally is made at the time

and a fair market value of $1,000. His partner• The partner’s distributive share of taxableof receipt of the partnership interest. The faircontributes $1,000 cash. While each partner hasand nontaxable partnership income.market value of such an interest received by aincreased his capital account by $1,000, whichpartner as compensation for services must gen- • The partner’s distributive share of the ex- will be reflected in the partnership books, theerally be included in the partner’s gross income cess of the deductions for depletion over adjusted basis of Sam’s interest is only $400in the first tax year in which the partner can the basis of the depletable property, un- and the adjusted basis of his partner’s interest istransfer the interest or the interest is not subject less the property is oil or gas wells whose $1,000.to a substantial risk of forfeiture. The capital basis has been allocated to partners.

interest transferred as compensation for serv- When determined. The adjusted basis of aices is subject to the rules for restricted property partner’s partnership interest is ordinarily deter-

Decreases. The partner’s basis is decreaseddiscussed in Publication 525 under Employee mined at the end of the partnership’s tax year.(but never below zero) by the following items.Compensation. However, if there has been a sale or exchange

of all or part of the partner’s interest or a liquida-• The money (including a decreased shareThe fair market value of an interest in part-tion of his or her entire interest in a partnership,of partnership liabilities or an assumptionnership capital transferred to a partner as pay-the adjusted basis is determined on the date ofof the partner’s individual liabilities by thement for services to the partnership is asale, exchange, or liquidation.partnership) and adjusted basis of prop-guaranteed payment, discussed earlier.

erty distributed to the partner by the part- Alternative rule for figuring adjusted basis.nership.Profits interest. A profits interest is a partner- In certain cases, the adjusted basis of a partner-

ship interest other than a capital interest. If a ship interest can be figured by using the• The partner’s distributive share of the part-person receives a profits interest for providing partner’s share of the adjusted basis of partner-nership losses (including capital losses).services to or for the benefit of a partnership in a ship property that would be distributed if the• The partner’s distributive share of nonde-partner capacity or in anticipation of being a partnership terminated.

ductible partnership expenses that are not This alternative rule can be used in either ofpartner, the receipt of such an interest is not acapital expenditures. This includes the the following situations.taxable event for the partner or the partnership.partner’s share of any section 179 ex-

However, this does not apply in the following • The circumstances are such that the part-penses, even if the partner cannot deductsituations. ner cannot practicably apply the generalthe entire amount on his or her individual

basis rules.income tax return.• The profits interest relates to a substan-tially certain and predictable stream of in- • It is, in the opinion of the IRS, reasonable• The partner’s deduction for depletion forcome from partnership assets, such as to conclude that the result produced willany partnership oil and gas wells, up toincome from high-quality debt securities or not vary substantially from the result underthe proportionate share of the adjusted ba-a high-quality net lease. the general basis rules.sis of the wells allocated to the partner.

• Within 2 years of receipt, the partner dis-Partner ’s l iabi l i t ies assumed by Adjustments may be necessary in figuring theposes of the profits interest.

partnership. If contributed property is subject adjusted basis of a partnership interest under• The profits interest is a limited partnership to a debt or if a partner’s liabilities are assumed the alternative rule. For example, adjustments

interest in a publicly traded partnership. by the partnership, the basis of that partner’s would be required to include in the partner’s

Page 14



share of the adjusted basis of partnership prop- • A fiduciary and a beneficiary of two sepa- Example. Ted and Jane form a cash basiserty any significant discrepancies that resulted general partnership with cash contributions ofrate trusts if the same person is a grantorfrom contributed property, transfers of partner- $20,000 each. Under the partnership agree-of both trusts.ship interests, or distributions of property to the ment, they share all partnership profits and• A fiduciary of a trust and a corporation ifpartners. losses equally. They borrow $60,000 and

the trust or the grantor of the trust directly purchase depreciable business equipment. Thisor indirectly owns 80% or more in value of debt is included in the partners’ basis in theEffect of Partnership the outstanding stock of the corporation. partnership because incurring it creates an addi-Liabilities tional $60,000 of basis in the partnership’s• A person and a tax-exempt educational or

depreciable property.charitable organization controlled directlyA partner’s basis in a partnership interest in-If neither partner has an economic risk ofor indirectly by the person or by memberscludes the partner’s share of a partnership liabil-

loss in the liability, it is a nonrecourse liability.of the person’s family.ity only if, and to the extent that, the liability:Each partner’s basis would include his or her• A corporation and a partnership if the share of the liability, $30,000.1. Creates or increases the partnership’s ba- same persons own 80% or more in value If Jane is required to pay the creditor if thesis in any of its assets, of the outstanding stock of the corporation partnership defaults, she has an economic risk

2. Gives rise to a current deduction to the and 80% or more of the capital or profits of loss in the liability. Her basis in the partnershippartnership, or interest in the partnership. would be $80,000 ($20,000 + $60,000), while

Ted’s basis would be $20,000.3. Is a nondeductible, noncapital expense of • Two S corporations or an S corporationthe partnership. and a C corporation if the same persons Limited partner. A limited partner generally

own 80% or more in value of the outstand- has no obligation to contribute additional capitalThe term “assets” in (1) includes capitalizeding stock of each corporation. to the partnership and therefore does not haveitems allocable to future periods, such as organi-

an economic risk of loss in partnership recoursezation expenses. • An executor and a beneficiary of an es-liabilities. Thus, absent some other factor, suchtate.A partner’s share of accrued but unpaid ex-as the guarantee of a partnership liability by thepenses or accounts payable of a cash basis • A partnership and a person owning, di- limited partner or the limited partner making thepartnership are not included in the adjusted ba- rectly or indirectly, 80% or more of the loan to the partnership, a limited partner gener-sis of the partner’s interest in the partnership.

capital or profits interest in the partnership. ally does not have a share of partnership re-course liabilities.• Two partnerships if the same persons di-Partner’s basis increased. If a partner’s

rectly or indirectly own 80% or more of theshare of partnership liabilities increases, or a Partner’s share of nonrecourse liabilities.capital or profits interests.partner’s individual liabilities increase because A partnership liability is a nonrecourse liability if

he or she assumes partnership liabilities, this no partner or related person has an economicProperty subject to a liability. If propertyincrease is treated as a contribution of money by risk of loss for that liability. A partner’s share of

contributed to a partnership by a partner or dis-the partner to the partnership. nonrecourse liabilities is generally proportionatetributed by the partnership to a partner is subject to his or her share of partnership profits. How-to a liability, the transferee is treated as havingPartner’s basis decreased. If a partner’s ever, this rule may not apply if the partnershipassumed the liability to the extent it does notshare of partnership liabilities decreases, or a has taken deductions attributable to nonre-exceed the fair market value of the property.partner’s individual liabilities decrease because course liabilities or the partnership holds prop-

the partnership assumes his or her individual erty that was contributed by a partner.liabilities, this decrease is treated as a distribu- Partner’s share of recourse liabilities. A

More information. For more information ontion of money to the partner by the partnership. partnership liability is a recourse liability to thethe effect of partnership liabilities, includingextent that any partner or a related person, de-rules for limited partners and examples, seefined earlier, has an economic risk of loss forAssumption of liability. A partner or relatedsections 1.752–1 through 1.752–5 of the regu-person is considered to assume a partnership that liability. A partner’s share of a recourselations.liability only to the extent that: liability equals his or her economic risk of loss for

that liability. A partner has an economic risk of1. He or she is personally liable for it, loss if that partner or a related person would be

obligated (whether by agreement or law) to2. The creditor knows that the liability was Disposition ofmake a net payment to the creditor or a contribu-assumed by the partner or related person,tion to the partnership with respect to the liability Partner’s Interest3. The creditor can demand payment from if the partnership were constructively liquidated.

the partner or related person, and A partner who is the creditor for a liability that The following discussions explain the treatmentwould otherwise be a nonrecourse liability of the4. No other partner or person related to anof gain or loss from the disposition of an interestpartnership has an economic risk of loss in thatother partner will bear the economic risk of in a partnership.liability.loss on that liability immediately after the

Abandoned or worthless partnershipassumption. Constructive liquidation. Generally, in a interest. A loss incurred from the abandon-constructive liquidation, the following events are ment or worthlessness of a partnership interestRelated person. Related persons, for these treated as occurring at the same time. is an ordinary loss only if both of the followingpurposes, includes all the following.

tests are met.• All partnership liabilities become payable• An individual and his or her spouse, an- in full. • The transaction is not a sale or exchange.cestors, and lineal descendants.• All of the partnership’s assets have a • The partner has not received an actual or• An individual and a corporation if the indi- value of zero, except for property contrib- deemed distribution from the partnership.vidual directly or indirectly owns 80% or uted to secure a liability.

more in value of the outstanding stock of If the partner receives even a de minimis actual• All property is disposed of by the partner-the corporation. or deemed distribution, the entire loss generally

ship in a fully taxable transaction for no is a capital loss. However, see Payments for• Two corporations that are members of the consideration (except relief from liabilities Unrealized Receivables and Inventory Items,same controlled group. for which the creditor’s right to reimburse- later.ment is limited solely to one or more as-• A grantor and a fiduciary of any trust.sets of the partnership). Partnership election to adjust basis of part-• Fiduciaries of two separate trusts if the nership property. Generally, a partnership’s• All items of income, gain, loss, or deduc-same person is a grantor of both trusts. basis in its assets is not affected by a transfer oftion are allocated to the partners.• A fiduciary and a beneficiary of the same an interest in the partnership, whether by sale or

• The partnership liquidates.trust. exchange or because of the death of a partner.

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However, the partnership can elect to make an The gain allocable to the other assets can be Determining gain or loss. The income orreported under the installment method. loss realized by a partner upon the sale or ex-optional adjustment to basis in the year of trans-

change of its interest in unrealized receivablesfer. See Adjusting the Basis of Partnership Prop-and inventory items, discussed below, is theerty, later, for information on making the Payments for Unrealizedamount that would have been allocated to theelection. Receivables and Inventory partner if the partnership had sold all of its prop-

Items erty for cash at fair market value, in a fullySale, Exchange,taxable transaction, immediately prior to theor Other Transfer If a partner receives money or property in ex- partner’s transfer of interest in the partnership.

change for any part of a partnership interest, the Any gain or loss recognized that is attributable toThe sale or exchange of a partner’s interest in a amount due to his or her share of the the unrealized receivables and inventory itemspartnership usually results in capital gain or loss. partnership’s unrealized receivables or inven- will be ordinary gain or loss.However, see Payments for Unrealized Receiv- tory items results in ordinary income or loss.ables and Inventory Items, later, for certain ex- This amount is treated as if it were received for Example. You are a partner in ABC Partner-ceptions. Gain or loss is the difference between the sale or exchange of property that is not a ship. The adjusted basis of your partnershipthe amount realized and the adjusted basis of capital asset. interest at the end of the current year is zero.the partner’s interest in the partnership. If the This treatment applies to the unrealized re- Your share of potential ordinary income fromselling partner is relieved of any partnership ceivables part of payments to a retiring partner partnership depreciable property is $5,000. Theliabilities, that partner must include the liability or successor in interest of a deceased partner partnership has no other unrealized receivablesrelief as part of the amount realized for his or her only if that part is not treated as paid in ex- or inventory items. You sell your interest in theinterest. change for partnership property. See Liquida- partnership for $10,000 in cash and you report

tion at Partner’s Retirement or Death, later. the entire amount as a gain since your adjustedExample 1. Fred became a limited partnerbasis in the partnership is zero. You report asin the ABC Partnership by contributing $10,000 Unrealized receivables. Unrealized receiv- ordinary income your $5,000 share of potential

in cash on the formation of the partnership. The ables include any rights to payment not already ordinary income from the partnership’s depre-adjusted basis of his partnership interest at the included in income for the following items. ciable property. The remaining $5,000 gain is aend of the current year is $20,000, which in- capital gain.• Goods delivered or to be delivered to thecludes his $15,000 share of partnership liabili-

extent the payment would be treated asties. The partnership has no unrealized Inventory items. Inventory items are not justreceived for property other than a capitalreceivables or inventory items. Fred sells his stock-in-trade of the partnership. They also in-asset.interest in the partnership for $10,000 in cash. clude the following property.

He had been paid his share of the partnership • Services rendered or to be rendered. • Property that would properly be includedincome for the tax year.in the partnership’s inventory if on hand atFred realizes $25,000 from the sale of his These rights must have arisen under a con- the end of the tax year or that is heldpartnership interest ($10,000 cash payment + tract or agreement that existed at the time of primarily for sale to customers in the nor-$15,000 liability relief). He reports $5,000 sale or distribution, even though the partnership mal course of business.($25,000 realized − $20,000 basis) as a capital may not be able to enforce payment until a later

gain. • Property that, if sold or exchanged by thedate. For example, unrealized receivables in-partnership, would not be a capital assetclude accounts receivable of a cash method

Example 2. The facts are the same as in or section 1231 property (real or deprecia-partnership and rights to payment for work orExample 1, except that Fred withdraws from the ble business property held more than onegoods begun but incomplete at the time of thepartnership when the adjusted basis of his inter- year). For example, accounts receivablesale or distribution of the partner’s share.est in the partnership is zero. He is considered to acquired for services or from the sale ofThe basis for any unrealized receivables in-have received a distribution of $15,000, his relief inventory and unrealized receivables arecludes all costs or expenses for the receivablesof liability. He reports a capital gain of $15,000. inventory items.that were paid or accrued but not previously

taken into account under the partnership’s • Property held by the partnership thatExchange of partnership interests. An ex-method of accounting. would be considered inventory if held bychange of partnership interests generally does

the partner selling the partnership interestOther items treated as unrealized receiv-not qualify as a nontaxable exchange ofor receiving the distribution.ables. Unrealized receivables include poten-like-kind property. This applies regardless of

tial gain that would be ordinary income if thewhether they are general or limited partnershipfollowing partnership property were sold at itsinterests or interests in the same or different Notification required of partner. If a partnerfair market value on the date of the payment.partnerships. However, under certain circum- exchanges a partnership interest attributable to

stances, such an exchange may be treated as a unrealized receivables or inventory for money or• Mining property for which exploration ex-tax-free contribution of property to a partnership. property, he or she must notify the partnership inpenses were deducted.See Contribution of Property under Transac- writing. This must be done within 30 days of thetions Between Partnership and Partners, earlier. • Stock in a Domestic International Sales transaction or, if earlier, by January 15 of the

An interest in a partnership that has a valid Corporation (DISC). calendar year following the calendar year of theelection in effect under section 761(a) of the exchange. A partner may be subject to a $50• Certain farm land for which expenses forInternal Revenue Code to be excluded from the penalty for each failure to notify the partnershipsoil and water conservation or land clear-partnership rules of the Code is treated as an about such a transaction, unless the failure wasing were deducted.interest in each of the partnership assets and not due to reasonable cause and not willful neglect.as a partnership interest. See Exclusion From • Franchises, trademarks, or trade names.

Information return required of partnership.Partnership Rules, earlier. • Oil, gas, or geothermal property for which When a partnership is notified of an exchange ofintangible drilling and development costsInstallment reporting for sale of partnership partnership interests involving unrealized re-were deducted.interest. A partner who sells a partnership in- ceivables or inventory items, the partnership

terest at a gain may be able to report the sale on must file Form 8308. Form 8308 is filed with• Stock of certain controlled foreign corpora-the installment method. For requirements and Form 1065 for the tax year that includes the lasttions.other information on installment sales, see Pub- day of the calendar year in which the exchange• Market discount bonds and short-term ob-lication 537. took place. If notified of an exchange after filing

ligations.Part of the gain from the installment sale may Form 1065, the partnership must file Form 8308be allocable to unrealized receivables or inven- separately, within 30 days of the notification.• Property subject to recapture of deprecia-tory items. See Payments for Unrealized Re- tion under sections 1245 and 1250 of the On Form 8308, the partnership states theceivables and Inventory Items, later. The gain Internal Revenue Code. Depreciation re- date of the exchange and the names, ad-allocable to unrealized receivables and inven- capture is discussed in chapter 3 of Publi- dresses, and taxpayer identification numbers oftory items must be reported in the year of sale. cation 544. the partnership filing the return and the trans-

Page 16



feree and transferor in the exchange. Also, the nize a loss only if the distribution is in money,Liquidation at Partner’sunrealized receivables, and inventory items. Nopartnership provides their telephone number. Retirement or Death loss is recognized if any other property is re-The partnership must provide a copy of Formceived. See Partner’s Gain or Loss under Part-8308 (or a written statement with the same infor- Payments made by the partnership to a retiringnership Distributions, earlier.mation) to each transferee and transferor by the partner or successor in interest of a deceased

later of January 31 following the end of the partner in return for the partner’s entire interestOther payments. Payments made by thecalendar year or 30 days after it receives notice in the partnership may have to be allocatedpartnership to a retiring partner or successor inbetween payments in liquidation of the partner’sof the exchange. interest of a deceased partner that are not madeinterest in partnership property and other pay-The partnership may be subject to a penalty in exchange for an interest in partnership prop-ments. The partnership’s payments include anof up to $50 for each failure to timely file Form erty are treated as distributive shares of partner-assumption of the partner’s share of partnership8308 and a $50 penalty for each failure to fur- ship income or guaranteed payments. This ruleliabilities treated as a distribution of money.nish a copy of Form 8308 to a transferor or applies regardless of the time over which the

For income tax purposes, a retiring partnertransferee, unless the failure is due to reasona- payments are to be made. It applies to paymentsor successor in interest of a deceased partner isble cause and not willful neglect. If the failure is made for the partner’s share of unrealized re-treated as a partner until his or her interest in theintentional, a higher penalty may be imposed. ceivables and goodwill not treated as a distribu-partnership has been completely liquidated.See the form instructions for details. tion.

If the amount is based on partnership in-Liquidating payments. Payments made in come, the payment is taxable as a distributiveStatement required of partner. If a partner liquidation of the interest of a retiring or de- share of partnership income. The payment re-sells or exchanges any part of an interest in a ceased partner in exchange for his or her inter- tains the same character when reported by thepartnership having unrealized receivables or in- est in partnership property are considered a recipient that it would have had if reported by theventory, he or she must file a statement with his distribution, not a distributive share or guaran- partnership. For more information, see Partner’sor her tax return for the year in which the sale or teed payment that could give rise to a deduction Income or Loss, earlier.exchange occurs. The statement must contain (or its equivalent) for the partnership. If the amount is not based on partnershipthe following information.

Unrealized receivables and goodwill. income, it is treated as a guaranteed payment.Payments made for the retiring or deceased The recipient reports guaranteed payments as• The date of the sale or exchange.partner’s share of the partnership’s unrealized ordinary income. For additional information on• The amount of any gain or loss attributa- receivables or goodwill are not treated as made guaranteed payments, see Transactions Be-

ble to the unrealized receivables or inven- in exchange for partnership property if both of tween Partnership and Partners, earlier.tory. the following tests are met. These payments are included in income by

the recipient for his or her tax year that includes• The amount of any gain or loss attributa- • Capital is not a material income-producing the end of the partnership tax year for which theble to capital gain or loss on the sale of factor for the partnership. (Whether capital payments are a distributive share or in which thethe partnership interest. is a material income-producing factor is partnership is entitled to deduct them as guaran-explained in the discussion under Family teed payments.

Partner’s disposition of distributed unreal- Partnership near the beginning of this pub- Former partners who continue to make guar-lication.)ized receivables or inventory items. In gen- anteed periodic payments to satisfy the

eral, any gain or loss on a sale or exchange of partnership’s liability to a retired partner after the• The retiring or deceased partner was aunrealized receivables or inventory items a part- partnership is terminated can deduct the pay-general partner in the partnership.ner received in a distribution is an ordinary gain ments as a business expense in the year paid.

However, this rule does not apply to paymentsor loss. For this purpose, inventory items do notfor goodwill to the extent that the partnershipinclude real or depreciable business property,agreement provides for a reasonable paymenteven if they are not held more than 1 year.to a retiring partner for goodwill. Adjusting the Basis of

Example. Mike, a distributee partner, re-Payments for unrealized receivables orceived his share of accounts receivable when Partnership Propertygoodwill are not treated as made inhis law firm dissolved. The partnership used theexchange for partnership propertyCAUTION

!cash method of accounting, so the receivables Generally, a partnership cannot adjust the basis

under any circumstance if the partner retired orhad a basis of zero. If Mike later collects the of its property because of a distribution of prop-died before January 5, 1993 (or retired on or erty to a partner or because of a transfer of anreceivables or sells them, the amount he re-after that date if a written contract to buy the interest in the partnership, whether by sale orceives will be ordinary income. partner’s interest in the partnership was binding exchange or because of the death of a partner.

Exception for inventory items held more on January 4, 1993, and at all times thereafter). The partnership can adjust the basis only if itthan 5 years. If a distributee partner sells in- Unrealized receivables are defined earlier files an election to make an optional adjustmentventory items held for more than 5 years after under Payments for Unrealized Receivables to the basis of its property upon all distributionsthe distribution, the type of gain or loss depends and Inventory Items. However, for this purpose, and transfers. A partnership does not adjust theon how they are being used on the date sold. they do not include the items listed in that dis- basis of partnership property for a contribution ofThe gain or loss is capital gain or loss if the cussion under Other items treated as unrealized property, including money, to the partnership.property is a capital asset in the partner’s hands receivables.at the time sold. Distributions. When there is a distribution ofPartners’ valuation. Generally, the part-

partnership property to a partner, the partner-ners’ valuation of a partner’s interest in partner-Example. Ann receives, through dissolution ship makes the optional adjustment by: ship property in an arm’s-length agreement willof her partnership, inventory that has a basis of be treated as correct. If the valuation reflects 1. Increasing the adjusted basis of the re-$19,000. Within 5 years, she sells the inventory only the partner’s net interest in the property tained partnership property by:for $24,000. The $5,000 gain is taxed as ordi- (total assets less liabilities), it must be adjustednary income. If she had held the inventory for so that both the value of and the basis for the a. Any gain recognized by the distributeemore than 5 years, her gain would have been partner’s interest include the partner’s share of partner on the distribution, pluscapital gain, provided the inventory was a capital partnership liabilities.

b. The excess, if any, of the partnership’sasset in her hands at the time of sale.Gain or loss on distribution. Upon the re- adjusted basis for the distributed prop-

Substituted basis property. If a distributee ceipt of the distribution, the retiring partner or erty (immediately before the distribu-partner disposes of unrealized receivables or successor in interest of a deceased partner will tion) over the basis of the property toinventory items in a nonrecognition transaction, recognize gain only to the extent that any money the distributee, orordinary gain or loss treatment applies to a later (and marketable securities treated as money)disposition of any substituted basis property re- distributed is more than the partner’s adjusted 2. Decreasing the adjusted basis of the re-sulting from the transaction. basis in the partnership. The partner will recog- tained partnership property by:

Page 17



a. Any loss recognized by the distributee election. See section 301.9100–2 of the regula- Line 1. Gross sales of $409,465 are enteredpartner on the distribution, plus on line 1a. Returns and allowances of $3,365tions for more information.

are entered on line 1b, resulting in net sales ofb. The excess, if any, of the distributee$406,100, entered on line 1c.Revoking the election. Generally, the elec-partner’s basis for the distributed prop-

tion can be revoked only with the approval of theerty over the partnership’s adjusted ba- Line 2. Cost of goods sold, $267,641, fromIRS. An application to revoke the election mustsis for the property (immediately before Schedule A, line 8, is entered here.be filed with the IRS director for your area. Thisthe distribution). Line 3. Gross profit of $138,459 is shown onapplication must be filed within 30 days after the

this line.close of the partnership tax year for which theTiming of adjustment. If a partnership change is to be effective. The application must Line 7. Interest income on accounts receiv-completely liquidates the interest of a partner by be signed by one of the partners and state why able, $559, is entered on this line. The schedulemaking a series of cash payments treated as the partnership wishes to revoke the election. that must be attached for this line is not shown.distributions of the partner’s interest in partner- Examples of sufficient grounds for approving

ship property, the basis adjustments to partner- Line 8. Total income, $139,018 (lines 3the application include the following.ship property must correspond in timing and through 7), is shown here.amount with the recognition of gain or loss by • A change in the nature of the business.the retiring partner, or a deceased partner’s suc- • A substantial increase in assets. Deductionscessor in interest, with respect to those pay-ments. • A change in the character of the assets.

The partnership’s allowable deductions are• An increased frequency of retirements or shown on lines 9 through 21.Example. Alan owns a one-third interest in

shifts of partnership interests.the partnership Sylvan Associates. Sylvan has Line 9. All salaries and wages are includedan optional adjustment to basis election in ef- here except guaranteed payments to partnersHowever, the IRS will not approve an applica-fect. When Alan retires, Sylvan continues with- (shown on line 10). Frank enters the $29,350tion to revoke the election if its primary purposeout dissolution and agrees to liquidate Alan’s wages paid to the partnership’s employees. Theis to avoid decreasing the basis of partnershipone-third interest in the partnership property by partnership had no employment credits to re-assets upon a transfer or distribution.making a series of cash payments to Alan that duce that amount.are treated as distributions. The total amount of

Line 10. Guaranteed payments of $25,000payments Alan will receive is fixed and exceedsto partners Frank ($20,000) and Susan ($5,000)the adjusted basis of Alan’s interest in the part-are entered here.Form 1065nership.

Sylvan increases the adjusted basis of its Line 11. Repairs of $1,125 made to partner-Exampleproperty by Alan’s recognized gain in each part- ship equipment are entered on this line.nership tax year during which Alan recognizes

Line 12. During the year, $250 owed to theThis filled-in Form 1065 is for the AbleBakergain with respect to the payments.partnership was determined to be a whollyBook Store, a partnership composed of Frank

Transfers. When there is a transfer of a part- worthless business bad debt. The $250 isAble and Susan Baker. The partnership uses annership interest because of a sale or exchange shown on this line. (If this had been a nonbusi-accrual method of accounting and a calendaror a partner’s death, the partnership makes the ness bad debt, it would have been reported inyear for reporting income and loss. Frank worksoptional adjustment by: Part I of Schedule D (Form 1065) and includedfull time in the business, while Susan works

separately on Schedules K and K–1, line 7, as aapproximately 25% of her time in it. Both part-1. Increasing the adjusted basis of the part- stated short-term capital loss.)ners are general partners.nership property by the excess of:The partnership agreement states that Frank Line 13. Rent paid for the business prem-

will receive a yearly guaranteed payment ofa. The transferee’s basis for his or her ises, $20,000, is listed on this line.$20,000 and Susan will receive $5,000. Anypartnership interest, over

Line 14. Deductible taxes of $3,295 are en-profit or loss will be shared equally by the part-b. The transferee’s share of the adjusted tered on this line.ners. The partners are personally liable for allbasis of all partnership property, or

partnership liabilities. Both partners materially Line 15. Interest paid to suppliers during theparticipate in the operation of the business. year totaled $1,451. This is business interest, so2. Decreasing the adjusted basis of partner-

it is entered here.In addition to receiving income and payingship property by the excess of:expenses in its partnership operations, Lines 16a and 16c. Depreciation of $1,174AbleBaker made a $650 cash charitable contri-a. The transferee’s share of the adjusted claimed on assets used in the partnership’sbution, received $150 from ordinary dividends,basis of all partnership property, over business is entered on these lines. (Line 16b isand received $50 tax-exempt interest from mu- left blank because there is no depreciation listedb. The transferee’s basis for his or her nicipal bonds. elsewhere on the return.) Frank does not needpartnership interest.

Frank completes the partnership’s Form to attach Form 4562 because the partnership1065 as explained next. did not place property in service during 2003 orThese adjustments affect the basis of part-

depreciate or claim a deduction for a car or othernership property for the transferee partner only.Page 1 listed property.They become part of his or her share of the

common partnership basis. Line 20. Other allowable deductions ofThe IRS sent Frank a postcard with the$8,003 not listed elsewhere on the return and forMaking the election. The optional adjustment partnership’s preaddressed label, asking if hewhich a separate line is not provided on page 1to basis is made by filing a written statement with needed a Form 1065 package. He ordered aare included on this line. Frank attaches aForm 1065 for the tax year in which the distribu- package by phone and the IRS sent him theschedule that lists each deduction and thetion or transfer occurs. For the election to be package. When Frank completes the return, heamount included on line 20. This schedule is notvalid, the return must be filed on time, including places the partnership’s label in the addressshown.extensions. The statement must include the area on page 1.

name and address of the partnership, be signed Frank supplies all the information requested Line 21. The total of all deductions, $89,648by one of the partners, and state that the part- at the top of the page. (lines 9 through 20), is entered on this line.nership elects under section 754 to apply sec-tions 734(b) and 743(b) of the Internal RevenueCode. Once a valid election has been made, it Income Ordinary Income (Loss)applies in succeeding years until it is revoked.

The partnership’s ordinary income from theIf the election cannot be made with the re- Line 22. The amount on line 21 is sub-trade or business activity is shown on lines 1aturn, a partner or the partnership can request an tracted from the amount on line 8. The result,through 8.automatic extension of 12 months to make the $49,370, is entered here and on line 1 of Sched-

Page 18



ule K. The amount allocated to each partner is All information shown on the balance sheets for where to report the items on the partner’s indi-the AbleBaker Book Store should agree with itslisted on line 1 of Schedule K–1. vidual income tax return. Illustrated is a copy ofbooks of record. the Schedule K–1 for Frank W. Able. All infor-

mation asked for at the top of Schedule K–1The entry in column (d) of line 14 for totalSignatures must be supplied for each partner.assets at the end of the year, $45,391, is carried

to item F at the top of page 1 since the answer toFrank signs the return as a general partner. The question 5 on Schedule B was “No.” Allocation ofAbleBaker Book Store did not have a paid

Partnership Itemspreparer.

Schedule M–1 The partners’ shares of income, deductions,Page 2 etc., are shown next.Schedule M–1 is the reconciliation of incomeSchedule Aper the partnership books with income per Form1065.Schedule A shows the computation of cost of Income (Loss)

goods sold. Beginning inventory, $18,125, is Line 1. This line shows the net income perentered on line 1 and net purchases, $268,741, Line 1. This line on Schedule K–1 showsbooks of $48,920. This amount is from the profitare entered on line 2. The total, $286,866, is Frank’s share ($24,685) of the income from theand loss account (not shown in this example).entered on line 6. Ending inventory, $19,225 partnership shown on Form 1065, page 1, line

Line 3. This line shows the guaranteed pay-(entered on line 7), is subtracted from line 6 to 22. The total amount of income to both partnersments to partners.arrive at cost of goods sold, $267,641 (entered is shown on line 1, Schedule K.

on line 8 and on page 1, line 2). Line 5. This is the total of lines 1 through 4 Lines 4b(1) and 4b(2). Dividends must beFrank answers all applicable questions for of $73,920. separately stated. They are not included in the

item 9. income (loss) of the partnership on Form 1065,Line 6. Shown here is the $50 tax-exemptpage 1, line 22. Line 4b(2) on Schedule K showsinterest income from municipal bonds recordedSchedule B the total ordinary dividends of $150. All theseon the books but not included on Schedule K,ordinary dividends are qualified dividends solines 1 through 7. This interest is reported on

Schedule B contains 12 questions about the they are also shown on line 4b(1).These lines onSchedule K, line 19.partnership. Frank answers question 1 by mark- Schedule K–1 show Frank’s share, $75.

Line 9. This is line 5 less line 8, $73,870.ing the “Domestic general partnership” box. HeLine 5. This line on Schedule K–1 showsThis line is the same as line 1 of the Analysis ofanswers questions 2 through 11 by marking the

only the guaranteed payments to Frank ofNet Income (Loss) section of Schedule K at the“No” boxes. He answers question 12 by entering$20,000. This line on Schedule K shows the totaltop of page 4.-0- on this line.guaranteed payments to both partners ofQuestion 5 asks if the partnership meets all$25,000.the requirements listed in items 5a, b, and c.

Schedule M–2Because the partnership’s total receipts werenot less than $250,000, all three of these re- Schedule M–2 is an analysis of the partners’ Deductionsquirements are not met. Frank must complete capital accounts. It shows the total equity of allSchedules L, M–1, M–2, and item F on page 1 partners at the beginning and end of the tax year Line 8. During the year, the partnershipof Form 1065 and item J on Schedule K–1. and the adjustments that caused any increase made a $650 cash contribution to the American

or decrease. The total of all the partners’ capital Lung Association. Each partner may be able toPages 3 – 4 accounts is the difference between the deduct his or her share of the partnership’s char-

partnership’s assets and liabilities shown on itable contribution on his or her individual in-Schedule KSchedule L. A partner’s capital account does not come tax return if the partner itemizes

On Schedule K, Frank lists the total of both necessarily represent the tax basis for an inter- deductions. Frank’s share of the contribution,partners’ shares of income, deductions, credits, est in the partnership. $325, is entered on this line of Schedule K–1.etc. Each partner’s distributive share of income, This line on Schedule K shows the total contribu-Line 1. As of January 1, the total of thedeductions, credits, etc., is reported on Sched- tion. The partnership will show on an attachmentpartners’ capital accounts was $27,550ule K–1. The line items for Schedule K are the dollar amount of contributions subject to(Frank — $14,050; Susan — $13,500). Thisdiscussed in combination with the Schedule each of the 50%, 30%, and 20% of adjustedamount should agree with the beginning bal-K–1 line items, later. gross income limits.ance shown on line 21 of Schedule L for the

partners’ capital accounts.

Analysis of Net Income (Loss) Line 3. This is the net income per books. Investment InterestLine 5. This is the total of lines 1 through 4.An analysis must be made of the distributive Lines 14b(1) and 14b(2). The partnership

items on Schedule K. This analysis is based on had no interest expense on investment debts soLine 6. Each partner withdrew $26,440 (to-the type of partner. Since the AbleBaker Book there is no entry on line 14b(2). The partnershiptaling $52,880) from the partnership. TheseStore has two individual partners, both of whom had total ordinary dividends of $150 as shownwithdrawals are shown here and on Schedule K,are “active” general partners, the total on line 1, on line 4b(2). The $150 total ordinary dividendsline 22. The partners’ guaranteed payments,$73,870, is entered on line 2a, column ii. are also shown on line 14b(1) of Schedule K andwhich were actually paid, are not included be-

the partners’ share is shown on line 14b(1) ofcause they were deducted when figuring thePage 4 Schedule K–1. However, because all of the totalamount shown on line 3.

ordinary dividends are qualified dividendsSchedules L, M–1, and M–2 Line 9. This shows the total equity of all (shown on line 4b(1)), the partners will not bepartners as shown in the books of record as of able to treat their share of these dividends asPartnerships do not have to complete Sched-December 31. This amount should agree with investment income unless they elect to treatules L, M–1, or M–2 if all the tests listed underthe year-end balance shown on line 21 of qualified dividends as not eligible for the re-question 5 of Schedule B are met and question 5Schedule L for the partners’ capital accounts. duced tax rates. See the instructions for Formis marked “Yes.” The AbleBaker Book Store

Item J on Schedule K–1 reflects each 4952, Investment Interest Expense Deduction,does not meet all the tests, so these schedulespartner’s share of the amounts shown on lines 1 for details.must be completed.through 9 of Schedule M–2.

Schedule K–1 (Form 1065) Self-EmploymentSchedule L

Schedule L contains the partnership’s balance Schedule K–1 lists each partner’s share of in- Line 15a. Net earnings (loss) from self-em-sheets at the beginning and end of the tax year. come, deductions, credits, etc. It also shows ployment are figured using the worksheet in the

Page 19



Form 1065 instructions for Schedule K (not year on this line of Schedule K. He enters theOthershown). Frank and Susan’s net earnings from amount each partner withdrew on this line of the

Line 19. Frank enters the $50 municipalself-employment are the total of the partnership partner’s Schedule K–1.bond interest received by the partnership on thisincome shown on line 1 of Schedule K and theline of Schedule K and $25 on this line of eachguaranteed payments shown on line 5. Thispartner’s Schedule K–1.total, $74,370, is entered on Schedule K, and

each individual partner’s share is shown on his Line 22. Frank enters the $52,880 cashor her Schedule K–1. Each partner uses his or withdrawals made by the partners during theher share to figure his or her self-employmenttax on Schedule SE (Form 1040), Self-Employ-ment Tax (not shown).

Page 20



Proof as of

November 4, 2

003

(subject to

change)

Retail

Books

451211 45,391

10-1-79

2�

409,4653,365 406,100

267,641138,459

559

139,018

29,35025,000

1,125250

20,0003,295

1,451

1,174

8,003

89,648

49,370

1,174– 0 –

Frank W. Able 3-12-04

10-9876543AbleBaker Book Store334 West Main StreetOrange, MD 20904

DEC03

OMB No. 1545-0099U.S. Return of Partnership Income1065FormDepartment of the TreasuryInternal Revenue Service � See separate instructions.

A Principal business activity D Employer identification numberUse theIRSlabel.Other-wise,printor type.

Principal product or serviceB E Date business started

Business code numberC F Total assets (see page 14 ofthe instructions)

$

Final return(2)Initial return(1)Check applicable boxes:G (3) Name change (5) Amended return

Accrual(2)Cash(1)Check accounting method:H (3) Other (specify) �

Number of Schedules K-1. Attach one for each person who was a partner at any time during the tax year �I

Caution: Include only trade or business income and expenses on lines 1a through 22 below. See the instructions for more information.

1aa1 Gross receipts or sales1c1bb Less returns and allowances

22 Cost of goods sold (Schedule A, line 8)33 Gross profit. Subtract line 2 from line 1c4Ordinary income (loss) from other partnerships, estates, and trusts (attach schedule)4

Inco

me

55 Net farm profit (loss) (attach Schedule F (Form 1040))66 Net gain (loss) from Form 4797, Part II, line 18

77 Other income (loss) (attach schedule)

8 Total income (loss). Combine lines 3 through 7 8

9 Salaries and wages (other than to partners) (less employment credits)10Guaranteed payments to partners1011

Rent13

12

Interest15

13

Taxes and licenses14 14

Bad debts12

15

Repairs and maintenance11

16aDepreciation (if required, attach Form 4562)16a16c16bLess depreciation reported on Schedule A and elsewhere on returnb17Depletion (Do not deduct oil and gas depletion.)17

1918 Retirement plans, etc.

Employee benefit programs

21

19

Other deductions (attach schedule)

Ded

ucti

ons

(see

pag

e 15

of t

he in

stru

ctio

ns fo

r lim

itatio

ns)

Total deductions. Add the amounts shown in the far right column for lines 9 through 20

20 20

Ordinary income (loss) from trade or business activities. Subtract line 21 from line 8

21

22Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledgeand belief, it is true, correct, and complete. Declaration of preparer (other than general partner or limited liability company member) is based on allinformation of which preparer has any knowledge.Sign

HereDateSignature of general partner or limited liability company member

Preparer’s SSN or PTINDatePreparer’ssignature Check if

self-employed �PaidPreparer’sUse Only Firm’s name (or yours

if self-employed),address, and ZIP code

Form 1065 (2003)For Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11390Z

18

22

�

� EIN �

Phone no. ( )

For calendar year 2003, or tax year beginning , 2003, and ending , 20 .

9

(4) Address change

May the IRS discuss this returnwith the preparer shown below (seeinstructions)? Yes No�

2003

Page 21



Proof as of

November 4, 2

003

(subject to

change)

Form 1065 (2003) Page 2Cost of Goods Sold (see page 19 of the instructions)

11 Inventory at beginning of year22 Purchases less cost of items withdrawn for personal use33 Cost of labor4455 Other costs (attach schedule)66 Total. Add lines 1 through 577 Inventory at end of year88 Cost of goods sold. Subtract line 7 from line 6. Enter here and on page 1, line 2

9a Check all methods used for valuing closing inventory:

Lower of cost or market as described in Regulations section 1.471-4(ii)Cost as described in Regulations section 1.471-3(i)

(iii)

Check this box if the LIFO inventory method was adopted this tax year for any goods (if checked, attach Form 970) �cNod Do the rules of section 263A (for property produced or acquired for resale) apply to the partnership?NoYese Was there any change in determining quantities, cost, or valuations between opening and closing inventory?

If “Yes,” attach explanation.Other Information

Designation of Tax Matters Partner (see page 21 of the instructions)Enter below the general partner designated as the tax matters partner (TMP) for the tax year of this return:

Identifyingnumber of TMP

Name of designated TMP

Address of designated TMP

Other (specify method used and attach explanation) �

Yes

�

NoYes

8 Has this partnership filed, or is it required to file, Form 8264, Application for Registration of a Tax Shelter?

1

At any time during calendar year 2003, did the partnership have an interest in or a signature or other authorityover a financial account in a foreign country (such as a bank account, securities account, or other financialaccount)? See page 20 of the instructions for exceptions and filing requirements for Form TD F 90-22.1. If “Yes,”enter the name of the foreign country. �

9

Are any partners in this partnership also partnerships?2

During the partnership’s tax year, did the partnership own any interest in another partnership or in any foreignentity that was disregarded as an entity separate from its owner under Regulations sections 301.7701-2 and301.7701-3? If yes, see instructions for required attachment

3

Is this partnership subject to the consolidated audit procedures of sections 6221 through 6233? If “Yes,” seeDesignation of Tax Matters Partner below

4

Does this partnership meet all three of the following requirements?5

10

Does this partnership have any foreign partners? If “Yes,” the partnership may have to file Forms 8804, 8805and 8813. See page 20 of the instructions

6

Schedule A

Schedule B

� �

Was there a distribution of property or a transfer (e.g., by sale or death) of a partnership interest during the taxyear? If “Yes,” you may elect to adjust the basis of the partnership’s assets under section 754 by attaching thestatement described under Elections Made By the Partnership on page 8 of the instructions

11

During the tax year, did the partnership receive a distribution from, or was it the grantor of, or transferor to, aforeign trust? If “Yes,” the partnership may have to file Form 3520. See page 20 of the instructions

bc

a The partnership’s total receipts for the tax year were less than $250,000;The partnership’s total assets at the end of the tax year were less than $600,000; andSchedules K-1 are filed with the return and furnished to the partners on or before the due date (includingextensions) for the partnership return.If “Yes,” the partnership is not required to complete Schedules L, M-1, and M-2; Item F on page 1 of Form 1065;or Item J on Schedule K-1

What type of entity is filing this return? Check the applicable box:Domestic general partnership Domestic limited partnershipDomestic limited liability company

b Check this box if there was a writedown of “subnormal” goods as described in Regulations section 1.471-2(c) �

a b

Other �

c d Domestic limited liability partnershipf

7 Is this partnership a publicly traded partnership as defined in section 469(k)(2)?

Form 1065 (2003)

Foreign partnershipe

12 Enter the number of Forms 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, attachedto this return �

Additional section 263A costs (attach schedule)

18,125268,741

– 0 –– 0 –– 0 –

286,86619,225

267,641

��

�

�

�

�

�

�

��

�

�

�

�

– 0 –

Page 22



Proof as of

November 4, 2

003

(subject to

change)

49,370

150

25,000

650

150

74,370

50

52,880

Page 3Form 1065 (2003)

Partners’ Shares of Income, Credits, Deductions, etc.

Ordinary income (loss) from trade or business activities (page 1, line 22)1 1

Net income (loss) from rental real estate activities (attach Form 8825)2 23aGross income from other rental activities3a

Expenses from other rental activities (attach schedule)b 3b

Net income (loss) from other rental activities. Subtract line 3b from line 3ac 3c

Portfolio income (loss) (attach Schedule D (Form 1065) for lines 4d and 4e):4Interest incomea 4a

b 4b4cRoyalty incomec

Inco

me

(Lo

ss)

d4e(2)e

5Guaranteed payments to partners56a

7Other income (loss) (attach schedule)7

8Charitable contributions (attach schedule)89Section 179 expense deduction (attach Form 4562)9

10Deductions related to portfolio income (itemize)10

Ded

uc-

tio

ns

Other deductions (attach schedule)11 11

14a14a Interest expense on investment debts14b(1)(1)b Investment income included on lines 4a, 4b(2), 4c, and 4f above

Inve

st-

men

tIn

tere

st

14b(2)(2) Investment expenses included on line 10 above

12a Low-income housing credit: (1) From partnerships to which section 42(j)(5) applies 12a(1)12a(2)(2) Other than on line 12a(1)

Cre

dit

s

12bQualified rehabilitation expenditures related to rental real estate activities (attach Form 3468)b12cCredits (other than credits shown on lines 12a and 12b) related to rental real estate activitiesc12dCredits related to other rental activitiesd

Other credits13 13

15aNet earnings (loss) from self-employment15a15bGross farming or fishing incomeb

Self-

Empl

oy-

men

t

c Gross nonfarm income 15c16a16a16bb16c

Depreciation adjustment on property placed in service after 1986

cd

Depletion (other than oil and gas)16d(1)Gross income from oil, gas, and geothermal properties(1)

e16d(2)Deductions allocable to oil, gas, and geothermal properties(2)

Adju

stm

ents

and

Tax

Pref

eren

ceIte

ms

Other adjustments and tax preference items (attach schedule)

Name of foreign country or U.S. possession �17a17b

Foreign gross income sourced at partnership level:c

Deductions allocated and apportioned at partner level:

d

Total foreign taxes (check one): � Paid Accrued

e

17g

Deductions allocated and apportioned at partnership level to foreign source income:fFore

ign

Tax

es

18b18 Section 59(e)(2) expenditures: a Type � b Amount �

Oth

er

24 Other items and amounts required to be reported separately to partners (attach schedule)

Schedule K

Adjusted gain or loss

16e

192021

Tax-exempt interest incomeOther tax-exempt incomeNondeductible expenses

192021

Distributions of money (cash and marketable securities)Distributions of property other than money

2223

2223

b Gross income from all sources

Form 1065 (2003)

Reduction in taxes available for credit (attach schedule)g

17d(3)

17f(3)

17e(2)(1) Interest expense � (2) Other �

(1) General limitation �(3)

Listed categories (attach schedule) �(1) Passive � (2) General limitation �(3)

(2)

(a) Distributive share items (b) Total amount

17h

Passive � Listed categories (attach schedule) �

4d(2)

h

Gross income sourced at partner level 17c

Net short-term capital gain (loss): (1) post-May 5, 2003 � (2) Entire year �

Dividends: (1) Qualified dividends � (2) Total ordinary dividends �

Net long-term capital gain (loss): (1) post-May 5, 2003 � (2) Entire year �

Net section 1231 gain (loss) (attach Form 4797) (post-May 5, 2003)

4ff Other portfolio income (loss) (attach schedule)

6a6bb Net section 1231 gain (loss) (attach Form 4797) (entire year)

150

Page 23



Proof as of

November 4, 2

003

(subject to

change)

3,455 3,3507,150 10,990

7,150 10,99018,125 19,225

1,000 1,000

1,000 1,00015,00015,000

4,000 11,000 5,174

41,730 45,391

10,180 10,4624,000 3,600

7,739

27,550 23,59041,730 45,391

48,920

25,000

73,920

27,550

48,920

76,470

50

50

50

73,870

52,880

52,88023,590

9,826

73,870

73,870

Page 4Form 1065 (2003)

Balance Sheets per Books Beginning of tax year End of tax year

Assets (d)(c)(b)(a)

1 Cash2a Trade notes and accounts receivable

b Less allowance for bad debts3 Inventories4 U.S. government obligations

Tax-exempt securities5Other current assets (attach schedule)6Mortgage and real estate loans7Other investments (attach schedule)8Buildings and other depreciable assets9aLess accumulated depreciationbDepletable assets10aLess accumulated depletionbLand (net of any amortization)11Intangible assets (amortizable only)12aLess accumulated amortizationbOther assets (attach schedule)13Total assets14

Liabilities and Capital15 Accounts payable16 Mortgages, notes, bonds payable in less than 1 year17 Other current liabilities (attach schedule)18 All nonrecourse loans19 Mortgages, notes, bonds payable in 1 year or more20 Other liabilities (attach schedule)21 Partners’ capital accounts22 Total liabilities and capital

Reconciliation of Income (Loss) per Books With Income (Loss) per Return1 Net income (loss) per books2 Income included on Schedule K, lines 1

through 4, 6, and 7, not recorded on booksthis year (itemize):

4 Expenses recorded on books this year notincluded on Schedule K, lines 1 through11, 14a, 17g, and 18b (itemize):

a Depreciation $b Travel and entertainment $

5 Add lines 1 through 4

6 Income recorded on books this year not includedon Schedule K, lines 1 through 7 (itemize):

a Tax-exempt interest $

7 Deductions included on Schedule K, lines 1through 11, 14a, 17g, and 18b, not chargedagainst book income this year (itemize):

a Depreciation $

8 Add lines 6 and 79 Income (loss) (Analysis of Net Income (Loss),

line 1). Subtract line 8 from line 5Analysis of Partners’ Capital Accounts

1 Balance at beginning of year2 Capital contributed: a Cash

3 Net income (loss) per books4 Other increases (itemize):

5 Add lines 1 through 4

6 Distributions: a Cashb Property

7 Other decreases (itemize):

8 Add lines 6 and 79 Balance at end of year. Subtract line 8 from line 5

Schedule L

Schedule M-1

Schedule M-2

3 Guaranteed payments (other than healthinsurance)

Net income (loss). Combine Schedule K, lines 1 through 7 in column (b). From the result, subtract thesum of Schedule K, lines 8 through 11, 14a, 17g, and 18b 1

(ii) Individual(active)

Analysis bypartner type:

(v) Exemptorganization

(i) Corporate (iv) Partnership (vi) Nominee/Other

General partners

Analysis of Net Income (Loss)

Limited partners

1

2

ba

(iii) Individual(passive)

Form 1065 (2003)

b Property

Note: Schedules L, M-1 and M-2 are not required if Question 5 of Schedule B is answered “Yes.”

Page 24



Proof as of

November 4, 2

003

(subject to

change)

10 9876543123-00-6789

Frank W. Able10 Green StreetOrange, MD 20904

AbleBaker Book Store334 West Main StreetOrange, MD 20904

�

50

Cincinnati

10,900

N/A

14,050 24,460 26,440

24,685

75

20,000

325

�Individual

5050

12,070

SCHEDULE K-1 OMB No. 1545-0099Partner’s Share of Income, Credits, Deductions, etc.� See separate instructions.(Form 1065)

For calendar year 2003 or tax year beginning , 2003, and ending , 20Department of the TreasuryInternal Revenue Service

Partnership’s identifying number �Partner’s identifying number �

Partnership’s name, address, and ZIP codePartner’s name, address, and ZIP code

(ii) End ofyear

(i) Before changeor termination

limited partnergeneral partnerA

Enter partner’s percentage of:

F

%

Partner’s share of liabilities (see instructions):

B

Profit sharing

Nonrecourse $

Loss sharing

Qualified nonrecourse financing

Ownership of capital

G Tax shelter registration number �

OtherWhat type of entity is this partner? �

C foreign partner?

D

H Check here if this partnership is a publicly tradedpartnership as defined in section 469(k)(2)

E I Check applicable boxes:

(c) 1040 filers enter theamount in column (b) on:(a) Distributive share item (b) Amount

1Ordinary income (loss) from trade or business activities1 See page 6 of Partner’sInstructions for Schedule K-1(Form 1065).

2Net income (loss) from rental real estate activities23Net income (loss) from other rental activities3

Portfolio income (loss):44a Form 1040, line 8aInterest incomea

4b(1) Form 1040, line 9b(1) Qualified dividendsb

4c Sch. E, Part I, line 4Royalty incomec(1) Net short-term capital gain (loss) (post-May 5, 2003)d(2) Net short-term capital gain (loss) (entire year)

Inco

me

(Lo

ss)

Other portfolio income (loss) (attach schedule)f

See pages 6 and 7 ofPartner’s Instructions forSchedule K-1 (Form 1065).

55 Guaranteed payments to partner

Other income (loss) (attach schedule)7 7

Sch. A, line 15 or 168Charitable contributions (see instructions) (attach schedule)89Section 179 expense deduction9 See pages 7 and 8 of

Partner’s Instructions forSchedule K-1 (Form 1065).

10Deductions related to portfolio income (attach schedule)10

Ded

uc-

tio

ns

Other deductions (attach schedule)11 11

12a 12a(1)Low-income housing credit: (1) From section 42(j)(5) partnerships12a(2)(2) Other than on line 12a(1)

Form 8586, line 5

Qualified rehabilitation expenditures related to rental real estateactivities

b

Cre

dit

s

12b

Credits (other than credits shown on lines 12a and 12b) relatedto rental real estate activities

cSee page 8 of Partner’sInstructions for Schedule K-1(Form 1065).12c

Credits related to other rental activitiesd 12dOther credits13 13

Schedule K-1 (Form 1065) 2003For Paperwork Reduction Act Notice, see Instructions for Form 1065.

�

$$

%

%

%

%

%

�

Cat. No. 11394R

limited liability company member

IRS Center where partnership filed return: (1) Final K-1 (2) Amended K-1Analysis of partner’s capital account:J

(e) Capital account at end ofyear (combine columns (a)

through (d))

(d) Withdrawals anddistributions

(a) Capital account atbeginning of year

(c) Partner’s share of lines3, 4, and 7, Form 1065,

Schedule M-2

(b) Capital contributedduring year

( )

4d(1) Sch. D, line 5, col. (g)

This partner is a

Is this partner a domestic or a

4d(2) Sch. D, line 5, col. (f)

�

2003

(2) Total ordinary dividends 4b(2) Form 1040, line 9a

(1) Net long-term capital gain (loss) (post-May 5, 2003)e 4e(1) Sch. D, line 12, col. (g)

(2) Net long-term capital gain (loss) (entire year) Sch. D, line 12, col. (f)4e(2)4f

�6a Net section 1231 gain (loss) (post-May 5, 2003) 6aNet section 1231 gain (loss) (entire year)b 6b

�

75

Page 25



Proof as of

November 4, 2

003

(subject to

change)

75

25

26,440

44,685

Page 2Schedule K-1 (Form 1065) 2003

(c) 1040 filers enter theamount in column (b) on:(b) Amount(a) Distributive share item

16a 16a

Adjusted gain or lossb See page 9 of Partner’sInstructionsfor Schedule K-1(Form 1065) andInstructions for Form 6251.

16b16c

Depreciation adjustment on property placed in service after 1986

c Depletion (other than oil and gas)d 16d(1)

e

(1) Gross income from oil, gas, and geothermal properties

Adju

stm

ents

and

Tax

Pref

eren

ce It

ems

(2) Deductions allocable to oil, gas, and geothermal properties 16d(2)Other adjustments and tax preference items (attach schedule) 16e

Form 1116, Part I

Total foreign taxes (check one): � Paid Accrued Form 1116, Part II

Fore

ign

Taxe

s

Form 1116, line 12

See page 9 of Partner’sInstructions for Schedule K-1(Form 1065).18b

18b

Section 59(e)(2) expenditures: a Type �

Oth

er

Recapture of low-income housing credit:2424aFrom section 42(j)(5) partnershipsa Form 8611, line 8

Other than on line 24ab 24b

25 Supplemental information required to be reported separately to each partner (attach additional schedules if more space isneeded):

Sup

ple

men

tal I

nfo

rmat

ion

�

��

192021

Tax-exempt interest incomeOther tax-exempt incomeNondeductible expenses

192021

Form 1040, line 8b

See pages 9 and 10 ofPartner’s Instructions forSchedule K-1 (Form 1065).

Amount �

22 Distributions of money (cash and marketable securities) 22

23 Distributions of property other than money 23�

Sch. SE, Section A or B15aNet earnings (loss) from self-employment15a15b See page 9 of Partner’s

Instructions for Schedule K-1(Form 1065).

Gross farming or fishing incomeb

Self-

em-

ploy

men

t

Gross nonfarm incomec 15c �

14a14a Interest expense on investment debts Form 4952, line 1

14b(1)(1) Investment income included on lines 4a, 4b(2), 4c, and 4fb See page 9 of Partner’sInstructions for Schedule K-1(Form 1065).(2) Investment expenses included on line 10 14b(2)In

vest

men

tIn

tere

st

�

Schedule K-1 (Form 1065) 2003

d

e

Name of foreign country or U.S. possession �

Gross income sourced at partner levelForeign gross income sourced at partnership level:

Deductions allocated and apportioned at partner level:

Deductions allocated and apportioned at partnership level toforeign source income:

17a

h

c

f

(2) Listed categories (attach schedule) (1) Passive

(3) General limitation

(1) Interest expense(2) Other

17c

17d(1)17d(2)17d(3)

17f(1)17f(2)17f(3)

17e(1)17e(2)

gReduction in taxes available for credit (attach schedule)

17g(3) General limitation

17h

(1) Passive(2) Listed categories (attach schedule)

Gross income from all sourcesb 17b

Page 26



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For more information, see Publication 1546, • Solving problems. You can get ment, Internal Revenue Service.”The Taxpayer Advocate Service of the IRS. face-to-face help solving tax problems

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order IRS Publication 1796, Federalstructions or call 1–800–829–1954. Betronically) and have your 2003 tax returnTax Products on CD-ROM, and obtain:sure to wait at least 6 weeks from the dateavailable because you will need to know

you filed your return (3 weeks if you filedyour filing status and the exact whole dol-electronically) and have your 2003 tax re-lar amount of your refund. • Current-year forms, instructions, and pub-turn available because you will need to lications.• Download forms, instructions, and publica- know your filing status and the exact

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accurate, courteous, and professional answers, • Internal Revenue Bulletins.• Search publications online by topic or we use several methods to evaluate the qualitykeyword. of our telephone services. One method is for a Buy the CD-ROM from National Technical In-

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Page 27



fee) or call 1–877–233–6767 toll free to buy CD-ROM for small businesses. IRS how to prepare a business plan, finding financ-the CD-ROM for $22 (plus a $5 handling fee). Publication 3207, Small Business Re- ing for your business, and much more. The de-The first release is available in early January source Guide, is a must for every small sign of the CD makes finding information easyand the final release is available in late Febru- business owner or any taxpayer about to start a and quick and incorporates file formats andary. business. This handy, interactive CD contains browsers that can be run on virtually any

all the business tax forms, instructions and pub- desktop or laptop computer.lications needed to successfully manage a busi- It is available in early April. You can get aness. In addition, the CD provides an free copy by calling 1–800–829–3676 or byabundance of other helpful information, such as visiting the website at www.irs.gov/smallbiz.

To help us develop a more useful index, please let us know if you have ideas for index entries.Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Self-employment tax . . . . . . . . . 6 Losses: Transactions withAYear of disposition . . . . . . . . . . . 7 Limits . . . . . . . . . . . . . . . . . . . . . . . 7 partner . . . . . . . . . . . . . . . . . . 11Activity not for profit . . . . . . . . . 8

Partner’s . . . . . . . . . . . . . . . . . . . . 6 Passive activities . . . . . . . . . . . . . 8Allocations:Sales or exchanges . . . . . . . . 12 Penalties:Built-in gain or loss . . . . . . . . . 13 E

Criminal . . . . . . . . . . . . . . . . . . . . 5Installment sale . . . . . . . . . . . . 16 e-file . . . . . . . . . . . . . . . . . . . . . . . . . 3Failure to file . . . . . . . . . . . . . . . . 5Interest expense . . . . . . . . . . . . 9 MElectronic filing . . . . . . . . . . . . . . 3Failure to furnish copy ofNonrecourse liability . . . . . . . . . 7 Marketable securities . . . . . . . . . 9Estimated tax . . . . . . . . . . . . . . . . 6 Schedule K–1 . . . . . . . . . . . . 5Partnership items . . . . . . . . . . . 19 More information (See Tax help)Expenses paid by partner . . . . 9 Other . . . . . . . . . . . . . . . . . . . . . . . 5Substantial economicTrust fund recovery . . . . . . . . . . 5effect . . . . . . . . . . . . . . . . . . . . . 6

NF Precontribution gain . . . . . . . . 10Alternative minimum tax . . . . . 6Nonrecourse liability . . . . . . . . . 7Family partnership . . . . . . . . . . . 2 Principal partner defined . . . . . 4Assistance (See Tax help)Not-for-profit activity . . . . . . . . . 8Form 1065: Profits interest . . . . . . . . . . . . . . 14At-risk limits . . . . . . . . . . . . . . . . . 8

Due date . . . . . . . . . . . . . . . . . . . 5 Publications (See Tax help)Audit, consolidated . . . . . . . . . . 7Example . . . . . . . . . . . . . . . . . . . 18 OSchedule K–1 . . . . . . . . . . . 5, 19 Organization expenses . . . . . . . 6 RB Form:

Related person . . . . . . . . . . . . . . 15Basis, partnership: 8082 . . . . . . . . . . . . . . . . . . . . . . . 7Adjusting . . . . . . . . . . . . . . . . . . 17 P8275 . . . . . . . . . . . . . . . . . . . . . . 13Distributions . . . . . . . . . . . . . . . 17 Partner’s:8308 . . . . . . . . . . . . . . . . . . . . . . 16 SElection, optional Alternative minimum tax . . . . . 68582 . . . . . . . . . . . . . . . . . . . . . . . 8 Section 179 deduction . . . . . . . . 8

adjustment . . . . . . . . . . . . . . . 18 Basis:8736 . . . . . . . . . . . . . . . . . . . . . . . 5 Self-employed healthTransfer of interest . . . . . . . . . 18 Distributed property . . . . . . 108832 . . . . . . . . . . . . . . . . . . . . . . . 2 insurance . . . . . . . . . . . . . . . . . 12Built-in gain or loss . . . . . . . . . 13 Partnership interest . . . . . . 148865 . . . . . . . . . . . . . . . . . . . . . . 13 Self-employment income . . . . . 6,Estimated tax . . . . . . . . . . . . . . . 6982 . . . . . . . . . . . . . . . . . . . . . . . . . 8 7Income or loss . . . . . . . . . . . . . . 6Free tax services . . . . . . . . . . . . 27C Self-employment tax . . . . . . . . . 6Interest:Capital interest . . . . . . . . . . . . 3, 14 Short period return . . . . . . . . . 3, 4Acquired by gift . . . . . . . . . . 14Comments . . . . . . . . . . . . . . . . . . . 2 G Substantial economicAlternative rule, adjustedCommunity property . . . . . . . . . 2 effect . . . . . . . . . . . . . . . . . . . . . . 6Gross income, partner . . . . . . . 6 basis . . . . . . . . . . . . . . . . . . 14Contribution: Substantially appreciatedGuaranteed payments . . . . . . . 12 Basis . . . . . . . . . . . . . . . . . . . . 14

Basis of property . . . . . . . . . . . 13 inventory items . . . . . . . . . . . . 9Basis adjustments . . . . . . . . 14Built-in gain or loss . . . . . . . . . 13 Suggestions . . . . . . . . . . . . . . . . . 2Book value . . . . . . . . . . . . . . 14HDistribution of property . . . . . . 13 Liquidation of . . . . . . . . 10, 17 Syndication fees . . . . . . . . . . . . . 6Help (See Tax help)Net precontribution gain . . . . 10 Mandatory basis

Husband-wife partnership . . . . 3Property . . . . . . . . . . . . . . . . . . . 13 adjustment . . . . . . . . . . . . 11 TServices . . . . . . . . . . . . . . . . . . . 14 Sale, exchange,Tax help . . . . . . . . . . . . . . . . . . . . . 27transfer . . . . . . . . . . . . . . . . 16ITax withholding, foreign personSpecial basisIncome or loss, partner’s . . . . . 6D

or firm . . . . . . . . . . . . . . . . . . . . . 2adjustment . . . . . . . . . . . . 11Insurance, self-employedDefinition, partnership . . . . . . . 2Tax year:Transactions withhealth . . . . . . . . . . . . . . . . . . . . . 12Determining ownership . . . . . 12 Business purpose . . . . . . . . . . . 5partnership . . . . . . . . . . . . . . 11Inventory items, substantiallyDistributions: Exceptions . . . . . . . . . . . . . . . . . . 5Partnership:appreciated . . . . . . . . . . . . . . . . 9Gain or loss . . . . . . . . . . . . . . . . . 9 Partner . . . . . . . . . . . . . . . . . . . . . 4Abandoned or worthlessInterest expense, loan . . . . . . . 9 Partnership . . . . . . . . . . . . . . . . . 4interest . . . . . . . . . . . . . . . . . . 15Partner’s debt . . . . . . . . . . . . . . 10 L Required . . . . . . . . . . . . . . . . . . . . 4Agreement . . . . . . . . . . . . . . . . . . 3Partnership . . . . . . . . . . . . . . . . . 9 Section 444 election . . . . . . . . . 5Liability: Basis, contributedDistributive share: Short period return . . . . . . . . . . 4Assumption of . . . . . . . . . . . . . . 15 property . . . . . . . . . . . . . . . . . 13Adjusted basis . . . . . . . . . . . . . 14 Nonrecourse . . . . . . . . . . . . . . . . 7 Taxpayer Advocate . . . . . . . . . . 27Capital interest . . . . . . . . . . . . . . 3Canceled qualified real property Partner’s assumed by Terminating a partnership . . . . 3Defined . . . . . . . . . . . . . . . . . . . . . 2business debt . . . . . . . . . . . . . 8 partnership . . . . . . . . . . . . . . 14 Exclusion from rules . . . . . . . . . 3 TTY/TDD information . . . . . . . . 27Character of items . . . . . . . . . . . 7 Partnership’s . . . . . . . . . . . . . . . 15 Family . . . . . . . . . . . . . . . . . . . . . . 2Determined by interest in Limited liability company . . . . . 2 Forming . . . . . . . . . . . . . . . . . . . . 2 Upartnership . . . . . . . . . . . . . . . 7 Liquidation: Husband-wife . . . . . . . . . . . . . . . 3Figuring . . . . . . . . . . . . . . . . . . . . 6 Unrealized receivables . . . . . . 16Constructive . . . . . . . . . . . . . . . 15 Income or loss . . . . . . . . . . . . . . 5Guaranteed payments . . . . . . 12 Partner’s interest . . . . . . . . . . . 10 Interest . . . . . . . . . . . . . . . . . . . . . 7 ■Limits on losses . . . . . . . . . . . . . 7 Partner’s retirement or Liabilities . . . . . . . . . . . . . . . . . . 15Reporting . . . . . . . . . . . . . . . . . . . 7 death . . . . . . . . . . . . . . . . . . . . 17 Terminating . . . . . . . . . . . . . . . . . 3Self-employment income . . . . . 6

Page 28

Documents

Partenership